A business owner applies for a bank loan to launch a fairly low-risk project. After receiving the loan, she cancels the low-risk project and instead uses the borrowed funds for a high-risk venture. This is an example of

Question

Quizplus · Accepted Answer

The scenario described in the question is an example of moral hazard. Moral hazard is when one party takes undue risks knowing that they will not have to bear the full consequences of those risks, because someone else will bear some of the costs. In this case, the business owner is taking a riskier bet with the loan funds now that they have access to them and do not have to worry about payback on the low-risk project.

A Business Owner Applies for a Bank Loan to Launch