Consider John, who purchases an insurance policy on a racquetball racket that he has acquired. He then proceeds to hit his racket against the wall every time he losses a point. This is an example of

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John's behavior of intentionally damaging his racquetball racket after purchasing an insurance policy is an example of moral hazard. Moral hazard refers to the tendency of individuals to take more risks or engage in risky behavior because they have insurance or will not bear the full cost of their actions. In this case, John's insurance policy may cover the damage he causes to his racket, which incentivizes him to engage in the risky behavior of hitting his racket against the wall.

Consider John, Who Purchases an Insurance Policy on a Racquetball