Moral hazard
Moral hazard is the tendency to take more risk when someone else bears the cost if things go wrong, such as a bank expecting a bailout or a driver who is fully insured.
It is a central problem in insurance, banking regulation and contracts, and a reason bailouts usually come with conditions such as wiping out shareholders.
Related terms
- Bailout: A bailout is when a government or central bank gives money to a failing company or bank to keep it from collapsing, usually because its failure would hurt the wider economy.
- Information asymmetry: Information asymmetry is when one side of a deal knows more than the other.
- Bank run: A bank run happens when many depositors withdraw their money at once because they fear the bank will fail, which can make it fail even if it was sound.
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