moral hazard

The risk that a party insulated from risk will behave differently than they would if fully exposed to that risk — especially when someone takes greater risks because they know someone else will bear the consequences.

• (compound term)

• moral hazard problem
• create moral hazard
• moral hazard in banking
• moral hazard in insurance
• reduce moral hazard

1. 1.The 2008 bank bailouts created a moral hazard: banks learned that they could take enormous risks because the government would rescue them if things went wrong — "too big to fail" became a guarantee of reckless behaviour. (systemic risk-taking)
2. 2.Comprehensive car insurance creates a mild moral hazard — drivers who know repairs are covered may park less carefully or delay maintenance. (insurance incentive distortion)

• perverse incentive (an incentive that produces unintended harmful behaviour)
• risk shifting (transferring risk to someone else)

"moral" (relating to behaviour) + "hazard" (risk) — originally an insurance term from the 18th century — the behavioural risk that insurance itself creates