Moral hazard:
A) is about the unobserved characteristics of people.
B) is about the unobserved actions of people.
C) occurs before the parties have entered into an agreement.
D) None of these statements is true.

Question

Quizplus · Accepted Answer

Moral hazard occurs when an individual or entity takes more risks because they know that they will not bear the full consequences of their actions. This is related to the unobserved actions of people, as they may choose to behave in a way that is riskier than they would if they were fully responsible for the outcomes of their actions. Moral hazard typically occurs after parties have entered into an agreement, such as an insurance contract or a loan, and can arise due to incomplete information or asymmetric information between the parties involved.

Moral Hazard