Moral hazard

Moral hazard refers to a situation where one party takes risks because they don’t bear the full consequences of those risks. This often occurs in insurance or finance; for example, if someone has insurance against theft, they may be less careful about securing their belongings, knowing they will be compensated if something goes wrong. This behavior can lead to riskier actions because the individual feels protected and less accountable for their decisions, potentially resulting in negative outcomes for others, like higher costs for insurers or financial instability.