One problem with government insurance that must be faced is how to avoid distorting risk-taking decisions by the managers of privately owned financial institutions. This kind of problem is an incidence of the more general type of the ______ problems encountered in the economics literature.

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Moral hazard occurs when one party in a transaction has the opportunity to assume additional risks that negatively affect the other party because the latter is partially or fully insulated from those risks, often through insurance. In the context of government insurance for financial institutions, managers might take riskier decisions knowing that losses will be covered by the government, thus illustrating a moral hazard problem.

One Problem with Government Insurance That Must Be Faced Is