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@ The Modern Sovereign
2025-05-01 09:43:52
What Is Moral Hazard?
"Moral hazard" is an economics and finance term that describes a situation where one party takes on risk because they don't have to bear the full consequences of that risk. It often arises when individuals or institutions are protected in some way—such as through insurance, bailouts, or guarantees—and therefore act less cautiously than they otherwise would.
For example, if a bank knows it will be bailed out by the government if it fails, it might engage in riskier lending practices, assuming taxpayers will pick up the tab if things go wrong. Similarly, someone with comprehensive car insurance might drive more recklessly, knowing that any damages will be covered.
Moral hazard doesn't imply bad morals—it’s more about incentives and how they change when people or companies don’t feel the full impact of their decisions.
It's a critical concept in understanding financial systems, public policy, and even everyday contracts. Whether in health care, banking, or corporate governance, recognizing and managing moral hazard helps create more stable and fair systems.