Moral hazard problems are likely to develop under what conditions?
A)They develop when you must depend on the hidden actions of others.
B)They occur when costs are rising.
C)They develop when risk aversion leads to irrational behavior.
D)They occur when private information is stolen by the other party.

Question

Quizplus · Accepted Answer

Moral hazard problems arise when one party (such as an insurer or lender) must rely on the actions of another party (such as a borrower or insured individual) but cannot fully observe or monitor their behavior. In this situation, the second party may be incentivized to engage in riskier behavior than they would otherwise, because they know that the first party will bear some or all of the costs if things go wrong. Cost increases or risk aversion may exacerbate moral hazard problems, but they are not the primary cause. Theft of private information may be a problem in some contexts, but it is not directly related to moral hazard.

Moral Hazard Problems Are Likely to Develop Under What Conditions