What is "Moral Hazard"?

"Moral Hazard"

In economic theory, a moral hazard is a situation where a party will have a tendency to take risks because the costs that could incur will not be felt by the party taking the risk. A moral hazard may occur where the actions of one party may change to the detriment of another after a transaction has taken place. 

For example, persons with insurance against automobile theft may be less cautious about locking their car, because the negative consequences of vehicle theft are now (partially) the responsibility of the insurance company. A party makes a decision about how much risk to take, while another party bears the costs if things go badly, and the party isolated from risk behaves differently from how it would if it were fully exposed to the risk. Another example would be cellular companies offering insurance on cell phones and tablets. People are less likely to be as protective of their phones knowing that the insurance will cover it if it was to break or be stolen.

Moral hazard arises because an individual or institution does not take the full consequences and responsibilities of his or its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to hold some responsibility for the consequences of those actions.

Economists explain moral hazard as a special case of information asymmetry, a situation in which one party in a transaction has more information than another. In particular, moral hazard may occur if a party that is insulated from risk has more information about its actions and intentions than the party paying for the negative consequences of the risk. More broadly, moral hazard occurs when the party with more information about its actions or intentions has a tendency or incentive to behave inappropriately from the perspective of the party with less information.

Moral hazard also arises in a principal–agent problem, where one party, called an agent, acts on behalf of another party, called the principal. The agent usually has more information about his or her actions or intentions than the principal does, because the principal usually cannot completely monitor the agent. The agent may have an incentive to act inappropriately (from the viewpoint of the principal) if the interests of the agent and the principal are not aligned.

(Note that the concept of moral hazard was the subject of renewed study by economists in the 1960s and then did not imply immoral behavior or fraud; rather, economists use the term to describe inefficiencies that can occur when risks are displaced, not the ethics or morals of the involved parties.)

-- Wikipedia, the free encyclopedia

How might this economic theory be likened to your current feelings of government provided assistance? Do you believe a far greater number of people on government provided assistance are of a certain race or gender? If so, what are your thoughts and why?

How might this theory relate to those who saw the government provided assistance go to victims of Hurricane Katrina and now, to victims of Hurricane Isaac? Do you believe people should have moved back into low-lying areas in New Orleans? If so, why? If not, why?

Thoughts?