Moral hazard refers to situations where one party to an agreement may take risks or act differently because they do not bear the full consequences of their actions, typically occurring after a contract or agreement is in place. It is not a normative judgement (A) nor is it always present with adverse selection (C), which is a different concept related to information asymmetry before a transaction.

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Moral Hazard

Question 77

Multiple Choice

Moral hazard:

A) is a normative judgement about the moral choices made by economic agents.
B) is about actions and occurs after parties have voluntarily entered into an agreement.
C) is always present when adverse selection arises.
D) All of these statements are true.

Correct Answer: