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1、Examplesofmoralhazard1.InsuranceandconsumerbehaviourIfyourbikeisnotinsuredyouwilltakegreatcaretoavoiditgettingstolen.Youwilllockitcarefully.However,ifitbecomesinsuredforitsfullvaluethenifitgetsstolenyoudonotreallyloseout.Therefore,youhavelessincentivetoprote
2、ctagainsttheft.Thisbecomesasituationofasymmetricinformation.Theinsurancecompanymayassumeyouwilllookafteryourbike,butyoumayknowthatyouwon’t.Inthesecasesaninsurancefirmfacesadilemma.Whenyourbikeisuninsured,ithassaya10%chanceofgettingstolen.Therefore,ifthebikei
3、sworth£1,000.Thecostofinsurancewouldbebasedaround£100.However,onceinsured,thebikemaynowhavea30%chanceofgettingstolen.Therefore,iftheinsurancefirmcharges£100basedonthe10%risk,itwillloseout.Thiscouldleadtoamissingmarket.Theinsurancefirmdoesn’twanttoinsurebicyc
4、lesbecausepeoplechangetheirbehaviour.2.MoralhazardandSubPrimeMortgagesInthecaseofthesub-primemortgagemarket.Lendersfacedasituationofmoralhazard.Theywereabletosellonanymortgagetheylenttootherfinancialinstitutions.Becausetherewasstrongdemandfromotherpeople,and
5、becauseotherbanksweretakingonalltherisk,themortgagecompanieshadlessincentivetocheckthemortgagescouldberepaid.Therefore,therewasabiggrowthinsub-primemortgagelendingwithinadequatechecksmade.3.BankBailoutsandMoralHazardIfamanufacturingcompanygoesbankrupt,thegov
6、ernmentwillnotintervene.Therefore,theyhaveanincentivetoavoidtakingunnecessaryrisks.However,generallygovernmentsfeeltheyhavetobailoutbankstopreventacollapseinconfidenceinthebankingindustry.Therefore,banksmaychangetheirbehaviourandtakemorerisks.Sometimespeople
7、argueweshould’tbailoutbanksbecausethiscreatesfuturemoralhazard.Ifwealwaysbailthemout,theywillrepeattheriskymistakeslater.4.FiscalandMonetaryUnionItisarguedthatmembershipoftheEurocancauseatypeofmoralhazard.AcountryintheEuromayassumethatifitgetsintodifficultie
8、s,othercountrieswillbailitout.Therefore,theymayallowdebttogrow.Forexample,whenGreecejoinedtheEuro,itbenefitedfromlowinterestratesbecauseitwasintheEuro.Thisencouragedthemtokeepborrowing,untilmark
