Moral Hazard

Moral hazard ( often written as " moral hazard" ) or moral hazard, also known as moral hazard or moral temptation, describes the problem of a change in behavior by insurance against a risk. Originally a term used in actuarial science, it is also used today generally economically.

Description

A moral hazard could occur if a contradiction arises between what, therefore, exists for the general public ( collective ), and what is reasonable for the individual is a contradiction between collective rationality and individual rationality. Therefore, the moral hazard is closely related with the rationality of the case. A moral hazard is applied when a higher authority (eg, a government ) or a collective entity ( eg, an insurance company ) wants to enforce a collective rationality, but this is exploited by individuals in favor of their own interests and, therefore, may undermine. In short, a moral hazard is to promote frivolous behavior due to the certainty of cover resulting damage risk.

Examples

Insurance

• Motorists drive by purchasing insurance reckless because any possible damage would be covered by the insurance. One possible solution lies in a high deductible or deductible by which the risk for the insurance decreased, on the other hand, the protection is reduced by the insurance for the policyholder ( conflict ).

Social

• A recipient of benefits ( Hartz IV unemployment or disability benefits ) will be punished for accepting a precarious work, if by ( modest ) economic rise, the benefits are reduced first and the renewed case of need (such as unemployment, illness or accident) the income from wage labor declines earlier than the support is reactivated by social performance. The income, including social security can be smaller by waiting different periods in the aggregate in the case of temporary employment than for continuous reference. The conflict can be mitigated by calculation of social benefits on a long term basis (with different assessment of cases of re-covering or re- reference ) as well as fast and easy approach to the reactivation of social benefits.

Piecework

• The term principal-agent problem, the problem is treated that workers reduce their performance, because the employer can not control everything. Helps reduce the risk to workers, which should be connected to a power reduction, reduced. Incentive payments or payment by results can motivate employees to provide greater performance.

Civil servants

• There is a presumption that the motivation of civil servants is low, because due to tenure and secure pensions claims lower motivation means no risk to the officers. A possible counter- argument would be that special services are rewarded with the " official privileges" (eg bonuses), such as special loyalty to the state or loyalty to the constitution, banning strikes and the like. Such considerations also apply to civil servant employment as in large companies.

Economic crises

• In economic crises in individual countries or large companies ( Too Big to Fail), the international institutions and the major industrial countries are forced to help out with money so that the individual state or the large company not the whole economy with it tears ( lender of last resort ). This can lead to risky behavior by individual governments and by large companies, the trust that you need to help if necessary.

Stock price decline

• Greenspan Put: A general decline in stock prices can seriously affect the investment activities and trigger an economic crisis. As a countermeasure, the central bank can buy up shares in Crash trap to prevent the spread of the values ​​decay. In consequence, the share prices are higher because the stock traders rely on such an intervention of the central bank in an emergency. These alleged guarantee by the central bank to a general decline in stock prices is named after the former U.S. Federal Reserve Chairman Alan Greenspan and after the normal hedging against price decline, the put options, Greenspan Put.

Health system

• When insurance coverage of Western health care systems is for the insured by the disintegration of action and liability a lesser incentive to restrict risky pastimes or unhealthy lifestyle, as in case of need arises the solidarity of the statutory health insurance for the cost of treatment. In health economics, this is referred to as ex ante moral hazard. - Possible Countermeasures: cost sharing in various forms, according to disease risk differentiated insurance premiums.
• As the cost of health care utilization do not play a role, there is a risk that patients ask too many services, even those that benefit very little or nothing at all. The resulting costs are borne by the public and raise the price of the overall system. In this case, is spoken in the health economics of ex post moral hazard. - Possible Countermeasures: Practical fees or other cost-sharing, waiting period.
• The moral hazard but also occurs with the therapists, such as physicians, to: Because the cost of treatment by the patient are not directly, but paid for by his insurance, the clinician is tempted to make unnecessary and / or costly treatments. - Possible Countermeasure: The doctors will no longer be remunerated for each prescribed power, but by a standard fee model ( flat rate per case and special pay, capitation ).

Philosophical approach

As a moral philosophical theorem of liberalism and neo-liberalism to the explanation of economic crises based moral hazard on the ethical idea of ​​the " wickedness of man " in a " ontologization of domination in terms of an end of history " opens in an extreme form.