moral hazard

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The observation that a contract which promises people payment on the occurrence of certain events will cause a change in behaviour to make these events more likely. For example, moral hazard suggests that if possessions are fully insured, their owners are likely to take less good care of them than if they were uninsured. The consequence is that insurance companies cannot offer full insurance. Moral hazard results from asymmetric information and is a cause of market failure. See also principal–agent problem.

Subjects: Economics.

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