Definition of Moral hazard:
Lack of incentive to guard against risk where one is protected from its consequences, e.g. by insurance.
Circumstance that increases the probability of occurrence of a loss, or a larger than normal loss, because of a change in an insurance policy applicants behavior after the issuance of policy. It may be due to the presence of incentives that induce the insured to act in ways that incur costs the insurer (but not the insured) has to bear. For example, overinsurance or substitution of insured valuable-assets with junk. In common usage, moral hazard suggests a conscious malicious or even illegal motivation, as opposed to an unconscious change in behavior. Compare with morale hazard.
Any time a party in an agreement does not have to suffer the potential consequences of a risk, the likelihood of a moral hazard increases.
Moral hazard is the risk that a party has not entered into a contract in good faith or has provided misleading information about its assets, liabilities, or credit capacity. In addition, moral hazard also may mean a party has an incentive to take unusual risks in a desperate attempt to earn a profit before the contract settles. Moral hazards can be present at any time two parties come into agreement with one another. Each party in a contract may have the opportunity to gain from acting contrary to the principles laid out by the agreement.
How to use Moral hazard in a sentence?
- Moral hazard can exist when a party to a contract can take risks without having to suffer consequences.
- Moral hazard is common in the lending and insurance industries but also can exist in employee-employer relationships.
- You can not always plan ahead for a moral hazard but when one comes about you need to be able to act accordingly.
- Tinas car was not quite damaged enough to total, but she had a crazy idea; she was going to damage it more and ask for an appeal, completely oblivious to the moral hazard she was going to create while hoping not to be caught.
- If you are not sure about a product and think it may be smart to pass on it the moral hazard may just be to strong.
- He is creating moral hazard by making investors think that investment risks are minimized simply by skimming an independent stock research report.
- Leading up to the 2008 financial crisis, the willingness of some homeowners to walk away from a mortgage was a previously unforeseen moral hazard.
Meaning of Moral hazard & Moral hazard Definition