Government bailouts of failing businesses, like banks during the recent economic crisis, will tend to reduce the motivation among entrepreneurs to make prudent decisions is dealing with business risk.

Question

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If entrepreneurs believe that the government will bail them out if their business fails, they may be less inclined to take appropriate precautions to mitigate risk and make sound business decisions. This can lead to a moral hazard problem, where businesses take on more risk than they ordinarily would because they know they are unlikely to bear the full consequences of their actions.

Government Bailouts of Failing Businesses, Like Banks During the Recent