Moral hazard refers to the incentive structure created by a decision that can lead individuals or businesses to behave in a particular way. It is the risk that the borrower will alter their behavior and not repay the loan, with the lender ultimately bearing the cost. Hence, option B, An incentive to engage in undesirable behavior, best describes moral hazard.

Solved

Moral Hazard Is

Question 44

Multiple Choice

Moral hazard is

A) The risk involved in accepting welfare.
B) An incentive to engage in undesirable behavior.
C) The involvement in illegal activity.
D) The abuse of the welfare system by some nonneedy recipients.

Correct Answer: