The problem of moral hazard arises when the owners of a security have:
A)an incentive to give potential buyers bad information.
B)little incentive to behave prudently after selling its asset.
C)a disincentive to give potential buyers bad information.
D)an incentive to behave according to expectations.

Question

Quizplus · Accepted Answer

Moral hazard is the risk that a party will take actions that are undesirable for the other party because the other party cannot observe those actions. In the case of securities, moral hazard arises when the owners of a security have little incentive to behave prudently after selling its asset, as the new owners would bear the costs of any negative outcomes that may occur. This creates a situation where the owners of the security may take on more risk than they otherwise would if they were still holding the security.

The Problem of Moral Hazard Arises When the Owners of a Security