When one party to a transaction has incentives to engage in activities detrimental to the other party,there exists a problem of

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Moral hazard arises when one party in a transaction has an incentive to take risks that are not in the best interest of the other party. For example, an insurance company may have an incentive to take on risky clients because they are more profitable, but this puts them at risk of having to pay out more claims. This creates a moral hazard problem. Split incentives refer to a situation where the incentives of the two parties involved in a transaction are opposed – for example, a landlord may have an incentive to skimp on maintenance while a tenant may want the property kept in good condition. Ex ante shirking is a problem that arises when workers don't put in as much effort as they promised before they were hired. Pre-contractual opportunism refers to situations where one party to a transaction takes advantage of the other party's lack of knowledge or information to negotiate an unfair contract.

When One Party to a Transaction Has Incentives to Engage