Introduction
Definition of Moral hazard
“Any situation in which one person makes the decision about how much risk to take, while someone else bears the cost if things go badly.”
– Paul Krugman
Moral hazard is a situation in which a person's decision about how much care to take can be influenced by the presence of insurance.
It can entail risk-taking behavior because the individual has been relieved of some personal responsibility for consequences or we can say that it the risk that a party has not entered into a contract in good faith or has provided misleading information about its assets, liabilities, or credit capacity.
In addition, moral hazard also may mean a party has an incentive to take unusual risks in a desperate attempt to earn a profit before the contract settles.
Moral hazards can be present at any time two parties come into agreement with one another. The possibility that a party to a contract will do something to his or her own benefit which will harm other parties, and so obtain benefits promised under the contract.