Moral hazard is an incentive for a party to a transaction to engage in risky or undesirable behavior because the transaction protects that same party against loss.

Question

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Moral hazard occurs when one party has an asymmetric level of information or control over a transaction, leading to risky or undesirable behavior because the consequences of that behavior do not directly fall on the party engaging in it. This can happen in situations such as insurance, where the insured party may be incentivized to engage in riskier behavior because they know they will be protected from the full consequences of their actions.

Moral Hazard Is an Incentive for a Party to a Transaction