The morals of moral hazard: a contracts approach

Abstract

Although moral hazard is a well-known economic concept, there is a long-standing controversy over its moral implications. The language economists use to describe moral hazard is often value-laden, and implies moral judgments about the persons or actions of economic agents. This in turn leads some to question whether it is actually a scientific concept, or simply a convenient tool for criticizing certain public policies. At present, there is no consensus about the moral meaning of moral hazard, or about whether the concept can be salvaged by economists. As a first step toward resolving this problem, I suggest a contracts approach to moral hazard. I use the 'title-transfer' theory of contract to clarify the moral content of moral hazard, thereby increasing its value to scholars in numerous disciplines. A contracts view is useful for economic policy discussions because it does not include hidden value judgments. At the same time, however, it is also valuable for ethicists because it directly explains a moral dimension of behavior under moral hazard, namely, the violation of property rights.

Principles of Monetary & Financial Sustainability and Wellbeing in a Post-COVID-19 World: The Crisis and Its Management

“…Moreover, as banks can fail (due to risky and hazardous practices), governments enforce a deposit insurance model to protect depositors with the support of central banks instead of encouraging a bail-in of bank creditors in case of bank troubles [89,90]. The problem with government bail-outs and public deposit insurance is the subsequent moral hazard [91,92]. When risky-banks as well as well-managed banks are treated equally paying the same fee for deposit insurance and having the same coverage, what incentive is there to do things right?…”

Accountability in the financial management practices of school principals

“…In simple terms, a moral hazard occurs when one party consciously participates in a risky undertaking knowing that he or she enjoys protection against the risk. McCaffrey (2017) defines “moral hazard” as a way of explaining how individuals can either influence the probability of taking part in a risky undertaking while pinning all hopes of surviving the possibility of suffering the consequences of such an undertaking on a particular imagined protection or taking advantage of an unfortunate event. ex ante moral hazard refers to a person's effect on the likelihood of an event, while ex-post moral hazard involves behaviour after the event has occurred (McCaffrey, 2017).…”

“…McCaffrey (2017) defines “moral hazard” as a way of explaining how individuals can either influence the probability of taking part in a risky undertaking while pinning all hopes of surviving the possibility of suffering the consequences of such an undertaking on a particular imagined protection or taking advantage of an unfortunate event. ex ante moral hazard refers to a person's effect on the likelihood of an event, while ex-post moral hazard involves behaviour after the event has occurred (McCaffrey, 2017). One of the fundamental features of a moral hazard is that both parties involved in the opportunistic risky undertaking do not have full information about each other; the which information, if it existed, would offer a reasonable degree of confidence in the party's survival of the adverse consequences that might occur.…”

Principles of Monetary and Financial Sustainability and Wellbeing in a post-COVID-19 World: the crisis and its management review

“…Because banks can fail (especially for hazardous expositions), the Governments inforce a deposit insurance model to protect depositors with the support of the Central Banks. The problem with this model is the moral hazard [24] and the equal treatment to risky-banks as well as well-managed banks: paying the same fee and having the same coverage, what incentive is there to do things right? So, maybe it is time to talk seriously about the State-Bank wall of separation.…”