Morale hazard is an insurance coverage term used to describe an insured person’s mindset about his possessions. It occurs when the man or woman does not treatment about his belongings for the reason that he knows he is insured. For example, suppose a man or woman pays insurance coverage for his new cell phone. Morale hazard occurs when the design of his cell phone results in being out-of-date and he no lengthier cares about it. He hopes his cell phone receives ruined right before his insurance coverage period of time is in excess of so he can get a new a person. He is indifferent to his cell phone and unconsciously variations his behavior to try to get a new a person.
Moral hazard describes the behavioral variations right before or soon after an celebration happens. Just one variety of moral hazard is ex-ante. Ex-ante moral hazard describes the behavioral transform of a man or woman or enterprise right before an celebration happens. For example, suppose Sherman, a expert snowboarder, does not have wellbeing insurance coverage and goes through his vocation with out undertaking tricky tricks that could depart him in the medical center. Sherman knows if he receives wounded and has to go to the medical center, he has to pay out the charges out-of-pocket. He decides to get wellbeing insurance coverage, and when his insurance coverage plan starts, he does tricky tricks and can take on a lot more danger. Sherman, consciously, can take on a lot more danger than right before he had insurance coverage for the reason that he has decreased his legal responsibility.
Ex-post moral hazard refers to the behavior of a bash soon after an celebration happens. For example, suppose a man or woman can take out a loan from a lender to get started a company. Immediately after he receives the loan, he may possibly say his company failed—although it was essentially profitable—to get a bailout or tax write-off. This is recognised as ex-publish moral hazard.
Moral hazard describes a mindful transform in behavior to try to advantage from an celebration that happens. Morale hazard describes an unconscious transform in a person’s behavior when he is insured.
(For relevant reading through, see: Moral Hazards: A Bump in the Deal Street.)