‘The moral hazard of limited liability’

“Moral hazard occurs when the ‘costs’ of a bad outcome of a (predictable) risk fall, in part or in whole, on someone other than those taking the risk, while at the same time benefiting from good outcomes. If the probabilities of that risk can be ascertained in advance, then, in principle, the risks can be insured and the risk taker will have to pay a higher premium, for example for obligatory flood insurance on a house built by a river. In this case, the moral hazard would then disappear. Otherwise, moral hazard leads those subjected to it to take excessive risks …” (more)

[Charles Goodhart, Vox, 30 July]

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