Moral hazard

Moral hazard is in Economics some non observable actions or behaviours that can lead to assymetric information between market participants. It has been first been analysied in the insurance industry. Many researchers have tried to defined it. Buchanan (1964) defines it as ""every deviation from correct human behavior that may pose a problem for an insurer".

It arise when one market participant do not bear all the full consequence of its actions. Therefore, he will be more inclined to act with more risk or less care than otherwise. For example, if a car accident cost a person $10.000 but the insurer pays $9.500, the insured person would have less incentive to avoid the accident.

Moral hazard in Finance

=> centrals banks with deposit insurance, IMF and bailout, LTCM,.. to be developped.

References

Buchanan, J. (1964), "The Inconsistencies of the National Health Service", Institute of Economic Affairs (Occasional papers n°7), Londres.

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