Skip to content
Econowmics
Menu
  • Home
  • Economics
    • Econometrics
    • Economics and History
    • Macroeconomics
    • Microeconomics
    • Miscellaneous
      • Awards and Honors
      • Economic Schools of Thought
      • Economic Quotes
      • Economic Videos
    • Terms and Concepts
  • Cognitive Biases
  • Data Analysis
    • Statistics
    • Python Programming
  • Contact
Menu

Moral Hazard

Posted on

Support for bad banks also raises the specter of what economists call moral hazard. If bankers know that the central bank will lend cheaply when liquidity runs dry, they needn’t take care to avoid crises in the first place. In 1873, The Economist’s editor-inchief Walter Bagehot described the danger this way:
If the banks are bad, they will certainly continue bad and will probably become worse if the Government sustains and encourages them. The cardinal maxim is, that any aid to a present bad Bank is the surest mode of preventing the establishment of a future good Bank.

Mastering ‘Metrics – Angrist and Pischke

 

Moral hazard was first used in the insurance industry, but can also be observed in many other situations. The term refers to the negative behavior of an individual or a group being insured. When an entity is insured, they may take greater risks compared to when they were not secured by the insurance and may expose themselves to greater risks. Paul Krugman defines the term as: “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.”

 

Moral Hazard

 

The examples are abundant. For instance, individuals who take some insurance for their car may drive more carelessly than ever before since someone else, here the insurance company, is bearing the risks. Likewise, an employee who feels that his or her position is safe in the firm may work with less efficiency. Also, banks may take greater risks if the government promises to support the loss-making banks.

 

 


Also watch

https://www.youtube.com/watch?v=HxPfJ0RpVaw

 

Further Reading

– Moral Hazard

– Moral Hazard, what is it and how it works

– What’s So Moral About Moral Hazard?

Related posts:

Measuring inequality: The 20:20 ratio
World Economic Forum
Milton Friedman
Opportunity Cost
George Akerlof: A citizen of the profession

Anything in here will be replaced on browsers that support the canvas element

  • Amos Tversky
  • Daniel Kahneman
  • cognitive bias
  • Milton Friedman
  • Wealth of Nations
  • Nobel Prize Laureate
  • Adam Smith
  • 20:20 ratio
  • law of small numbers
  • the halo effect
  • wealth inequality
  • income inequality
  • Law of Large Numbers
  • Dow Jones Industrial Average
  • status quo bias
  • Behavioral Economics
  • daniel kahnemann
  • hyperinflation
  • the gambler's fallacy
  • gambler's fallacy
©2023 Econowmics | Design: Newspaperly WordPress Theme