Unit 2.10 · Market Failure: Asymmetric Information
Moral Hazard
AO2HL
Syllabus Requirement
Occurs when one party takes on excessive risk because they do not bear the full consequences of that risk (e.g. post-contract behavior in insurance).
Assessment Objectives
AO2Application and Analysis
Summary
Moral hazard occurs when one party in a transaction has more information than the other, leading to risky behavior that can impose costs on the less informed party. This situation often arises in markets where information is asymmetric, resulting in inefficiencies and potential market failure. Understanding moral hazard is important for analyzing how information imbalances affect economic decisions and outcomes.