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Moral Hazard

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PPGPortal > Home > Concept Dictionary > K, L, M > Moral Hazard
 

Moral Hazard 

Problems in market efficiency created by the inability of one party in an exchange to view the actions of the other party.

(Dwayne Benjamin, Toronto PPG 1002H)

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For example, an individual who has theft insurance on their bicycle might be less careful about always locking up their bike than a person who has no insurance. Moral Hazard is only a problem if one side of the market can’t observe the actions of the other. For that reason, it is sometimes referred to as a “hidden action” problem.

     

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