When the existence of a contract changes the behavior of a party to the contract, the problem is called
A)irrational expectations.
B)adverse selection.
C)opportunity cost.
D)moral hazard.

Question

Quizplus · Accepted Answer

Moral hazard refers to the phenomenon where the existence of a contract changes the behavior of a party, who may take excessive risks or act in other irresponsible ways because they are protected by the terms of the contract. This is often an issue in insurance, where individuals may engage in riskier behavior knowing that they will be covered by their policy.

When the Existence of a Contract Changes the Behavior of a Party