Economics Dictionary of ArgumentsHome
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| Moral hazard: Moral hazard refers to the tendency of individuals or entities to take on higher risks or behave irresponsibly when they're insulated from the potential negative consequences of their actions. This behavior arises due to the presence of insurance, guarantees, or bailouts that mitigate the fallout of risky decisions, leading to increased recklessness or less cautious behavior. See also Insurances, Risks, Investments._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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Harold Demsetz on Moral Hazard - Dictionary of Arguments
Henderson I 56 Moral hazard/Arrow/Demsetz/DemsetzVsArrow/Henderson/Globerman: Moral hazard, a term from insurance, refers to the fact that when people are insured against a bad outcome, they make less effort than otherwise to avoid that bad outcome. When moral hazard arises in insurance markets, argued Arrow(1), insurance is "incomplete." Certain things are left uninsured. Demsetz didn't challenge the fact of moral hazard - it is a well-known problem. What he pointed out, though, is that moral hazard is a cost of providing insurance and therefore should be treated like any other cost. Moral hazard/Demsetz: Moral hazard, he wrote, "is not different from the cost that arises from the tendency of men to shirk when their employer is not watching them" (1969(2): 7). He also compared the moral hazard problem to the problem posed by the cost of mining iron ore: Some iron ore is left unearthed because it is too costly to bring to the surface. But we do not claim ore mining is ineffcient merely because mining is not "complete." Some risks are left uninsured because the cost of moral hazard is too great and this may mean that self-insurance is economic. DemsetzVsArrow: Arrow has fallen prey once again to the "free lunch fallacy." >Nirvana fallacy/Demsetz, >Free lunch/Demsetz. Henderson I 57 ArrowVsDemsetz/Henderson: Of course, Arrow could point correctly to the fact that if insurance did not tempt people to 9underinvest in care, there would not be a problem. DemsetzVsArrow: But then, noted Demsetz, Arrow's reasoning would be committing the "people could be different fallacy." >Free Market/Demsetz. 1. Arrow, Kenneth (1962). Economic Welfare and the Allocation of Resources for Innovation. In The Rate and Direction of Inventive Activity: Economic and Social Factors, National Bureau Committee for Economic Research (Princeton University Press). 2. Demsetz, Harold (1969). Information and Efficiency: Another Viewpoint. Journal of Law and Economics 12, 1 (April): 1-22._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
EconDems I Harold Demsetz Toward a theory of property rights 1967 Henderson I David R. Henderson Steven Globerman The Essential UCLA School of Economics Vancouver: Fraser Institute. 2019 |
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