Moral Hazard

Moral hazard occurs when parties involved in a transaction or other market activities (e.g., labor contracts) have different incentives and one party's action is unobservable or extremely costly to monitor. Moral hazard is a result of asymmetric information often in the context of principle–agent relationship with risk and uncertainty involved. In the insurance market, moral hazard causes individual patients incentive to control medical use as each person does not bear these costs. The total healthcare costs for the society as a whole increase and health insurance premium goes up as a result. For these reasons, moral hazard has long been understood to be a welfare decreasing effect of health insurance coverage. Although it is prevalent in insurance industry, moral hazard is common in other markets and industries such as financial markets, labor markets, and management.

Actuarial science · Auto insurance risk selection · Business · Casualty insurance · Context (archaeology) · Economics · Health care · Incentive · Insurance policy · Market economy · Microeconomics · Moral hazard · Morale hazard · Transaction cost · Unobservable · Welfare · Finance · Global Health Care Issues · Healthcare Policy and Management · Insurance and Financial Risk Management