Moral Hazard


Definition: Moral Hazard is the human tendency to be more willing to take a risk, knowing that the potential costs or burdens of taking such risk will be borne, in whole or in part, by others.
MH is a special case of asymmetric information, a situation in which one party in a transaction has more information than another. MH arises in the agency problem where the agent acts on behalf the principal.


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More on financial markets: Asymmetric Information, Call Option.

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