Let us suppose that you apply for a bank loan. You tell the bank that you are going to remodel your house, but after you get the loan you go to Las Vegas to gamble with the money. Your behavior is an example of

Question

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The behavior described is an example of moral hazard. This is because the borrower took on extra risk with the loan money once it was in their possession, knowing that the consequences of defaulting on the loan would fall on the bank rather than themselves. Moral hazard occurs when one party has an incentive to take on more risk, knowing that the cost of that risk will fall on someone else.

Let Us Suppose That You Apply for a Bank Loan