Moral hazard refers to a situation where one party takes excessive risks because they know that another party will bear the cost of any losses. It arises when an individual or organization has an incentive to engage in risky behavior without bearing the full consequences of their actions.
Moral hazard is often observed in situations where insurance or other forms of financial protection are involved. For example, if a homeowner has insurance against theft, they may be less likely to take precautions to protect their home, leading to increased risk of theft. Avoiding moral hazard is crucial for maintaining fairness and stability in various economic and social contexts. It helps prevent individuals or organizations from profiting from irresponsible actions while shifting the burden of losses to others.
