Moral hazard is said to exist when one party to a transaction
A)is not able to take advantage of the other party.
B)has the incentive to,and is able to,shift costs to another party in the transaction.
C)is subject to a hostile corporate takeover.
D)purchases insurance because they know they are involved in risky activities.
E)has no morals.

Question

Quizplus · Accepted Answer

Moral hazard occurs when one party has an incentive to take risks because the costs associated with those risks can be shifted to another party in the transaction. This often occurs in situations where insurance is involved, where the insured party has an incentive to engage in risky behavior because they know that the costs of any losses will be borne by the insurer.

Moral Hazard Is Said to Exist When One Party to a Transaction