Moral hazard
Definition. Moral hazard is a problem of asymmetric information that arises after a transaction or contract, when one party changes its behaviour and takes greater risks because it does not bear the full consequences of its actions. Insured parties, for example, may take less care once covered.
Moral hazard reflects hidden action that the other party cannot fully observe. It is a source of market failure and can be reduced through measures such as deductibles, monitoring, and aligning incentives.
This term belongs to Asymmetric Information in A Level Economics. Read the full chapter for the diagrams, worked examples and exam technique.
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