Moral hazard occurs when an agent tries to exploit information advantage in a dishonest way.

Question

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Moral hazard can occur when an agent (such as an employee, manager, or borrower) has an advantage over others by possessing private information, and uses that advantage to act in a way that is not aligned with the interests of the principal (such as a company, shareholder, or lender). This can lead to opportunistic behavior, shirking of responsibilities, or even fraud, as the agent seeks to maximize their own benefit at the expense of others.

Moral Hazard Occurs When an Agent Tries to Exploit Information