Definition
Moral Hazard
When insulation from risk causes people to take more risks than they otherwise would.
Definition
When insulation from risk causes people to take more risks than they otherwise would.
Why It Matters
Moral hazard is a central challenge in insurance, banking regulation, and social policy. Systems that protect people from consequences can inadvertently encourage the risky behavior that creates those consequences.
Policy Example
Student loan availability may contribute to college cost increases if universities know students can borrow to cover higher tuition — an indirect moral hazard where the insurer (government) enables risk-taking (tuition increases) by those it doesn't directly insure.
In Context