Sample Economics Essays On Moral Hazard

Homework Question on Moral Hazard

  • Choose an article that addresses moral hazard that does not date back further than 2006. Summarize the article and answer these questions:
  1. What is the moral hazard?
  2. Did the moral hazard take place, or do you think that it will take place in the future?
  3. What would you have done to mitigate the moral hazard? Include a link to your article choice.
  • In responding to your classmates’ posts, discuss if you agree or disagree with their rationale and critique of the chosen article.

Homework Answer on Moral Hazard

A moral hazard can be defined as any type of circumstance that makes an individual to take greater risks that will be handled by another person if things go bad. A moral hazard involves alteration of behavior by an individual to take additional risks. Similarly, The Economic Times (2015) define a moral hazard as a circumstance in which a party is involved in a risky incident knowing that another party will bear costs.

This means that neither party has sufficient information concerning each other. Generally, a moral risk can be experienced when: information is asymmetrical or a contract influences the behavior different parties. Information asymmetry is a situation where one party is in possession more information details than the other. For example, a bank purchasing a mortgage can assume its good based limited information it has and later incur extra costs after issuing loans (Dewan, 2012).

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On the other hand, behavioral contract relates to two different parties facing different incentives. For example, a country may be less motivated to reduce debts if it knows it will receive funding elsewhere such as from the International Monetary Fund (Financial Times). Moreover, another example of a moral hazard that has or could take place in future include: consumer and insurance behavior. In relation to consumer and insurance behavior, a house owner will show extra care for his or her house if it is not insured like installing burglar alarms (The Economic Times, 2015).