The Issue Of Moral Hazard Essay

The Issue Of Moral Hazard Essay

Length: 761 words (2.2 double-spaced pages)

Rating: Better Essays

Open Document

Essay Preview

Moral Hazard is a term that used to describe the situation when a party takes a risky action, even though it knows the action might have bad impact other parties. For example, you do not install smoke dictators, because you have fire insurance; as an insurance agent, you sign a contract with a bad credit policyholder, because you need to meet the sales target for this month. In both cases, you behave inappropriately, while you clearly understand the risks and the potential impacts that come with your action.
There is currently no law that restricts this type of immoral behaviors. The only attribute that prevents people from this is moral, which varies depending on people and highly mercurial. In finance industry, tragedies caused by immoral behaviors led to depressions for the following years. One of the most famous examples is bankrupt of Lehman Brothers Holding Inc in 2008. The driven force of this financial crisis is securitization. Securitization increases the equity of the market because “Securitization is the process through which an issuer creates a financial instrument by combining other financial assets and then marketing different tiers of the repackaged instruments to investors” (Investopedia). The disadvantage of Securitization is moral hazard. In the past, financial organizations would be more conscious in evaluating the credibility of the borrower when they organization issued loans. The reason behind is that they will be not be able to perform assignment of debt to get their money back. The only way to do so is to wait until the borrowers pay back their loans. However, nowadays financial organizations can reassignment the debt to others, which means the risks are also transferred to the people or organization who bu...

... middle of paper ...

...and started to go downhill, they are no longer able to hit the break. The trophies and valuables became the burden that accelerated the death.
Not everyone can easily go against human nature, greed in this case. Therefore, there are two ways of preventing moral hazard in business industry: incentives or punishment. The root cause of moral hazard is the unbalance in information. The party who holds more information tends to take risks and gain benefits from transactions, while the parties that know less information would usually suffer from the inappropriate act. Making sure the information are balance and transparent to both parties would be an essential act that can somewhat reduce moral hazard. In order to effectively regulate, the legislative branch of government would need to draft law regard to this issue, so that there are “guidelines” for companies to follow.

Need Writing Help?

Get feedback on grammar, clarity, concision and logic instantly.

Check your paper »

Essay on Moral Hazard : Perception Of Geoengineering As A Substitute

- Moral Hazard: perception of geoengineering as a substitute to mitigation Geoengineering can lead to moral hazard and government’s response will impact geoengineering’s return. Moral hazard is one of the major concerns of geoengineering. This term is often used in the insurance industry where the insured will most likely take on greater risk. It will be worrisome if geoengineering is misconceived as a substitute to mitigation, which means that people can continue to pollute, “avoid reducing growth, and keep up the pace of ‘business as usual’” (Buck, 2012, p.257)....   [tags: Global warming, Greenhouse gas, Risk, Climate]

Better Essays
1349 words (3.9 pages)

The Moral Hazard And Adverse Selection? How Can Health Insurers Get Around These Problems?

- Q1) Health insurance, whether provided publically or privately, suffers from the problems of moral hazard and adverse selection. How can health insurers get around these problems. To understand the moral hazard and adverse of health care system, first have to understand the health care system itself. Health care is provided to publics or citizens of the country in different ways. One if publically health care and other is private health care system. For example Canadian health care system. Canada provides its citizens or residences a public health care system....   [tags: Health care, Obesity, Health economics, Nutrition]

Better Essays
2418 words (6.9 pages)

Moral Hazard in Banking Essay

- Moral Hazard in Banking Moral hazard is an asymmetric information problem that occurs after a transaction. In essence, a lender runs the risk that a borrower will engage in activities that are undesirable from the lender's point of view, making it less likely that the loan will be paid back. Gary H. Stern's article, "Managing Moral Hazard with Market Signals: How Regulation Should Change with Banking", addresses the moral hazard problem inherent to the financial safety net provided by the government protection of depositors....   [tags: essays papers]

Better Essays
703 words (2 pages)

Health Insurance Should Be A Basic Human Right Essay

- Health insurance is a type of insurance that typically covers an insured person’s medical and surgical expenses. The insured person could either pay costs out-of-pocket and then they are reimbursed by their insurance company or the insurance company would pay the costs directly to the healthcare provider. The provider is a clinic, hospital, doctor, laboratory, health care practitioner or a pharmacy. (Nordqvist 2012). Medical assistance would be required in every individual’s life at some point in their lifetime....   [tags: Insurance, Risk, Moral hazard, Health care]

Better Essays
1033 words (3 pages)

Natural Hazards Can Have Devastating Impacts On Communities Essay

- “Natural hazards can have devastating impacts on communities.” Professor Gardoni states in lecture. He goes on to explain how natural hazards create losses for communities and individuals. These losses can accumulate to billions of dollars. The central issue is Tort Law: who should bear the costs of a disaster, the victims, the community, or the government. Risk is defined as two dimensions: the probability of occurrence and the associated consequences of a set of hazardous scenarios. Looking at a scale of risk the higher ranked is determined by how large the consequences are due to greater probability....   [tags: Hazard, Risk, Nature, Natural hazard]

Better Essays
960 words (2.7 pages)

Essay on Lack Of Knowledge Regarding Any Hazardous Event

- Uncertainty is the lack of knowledge regarding any hazardous event. Risk assessments have become very important in decision making for emergency managers. Many issues surround lack of data and randomness of natural hazards. All environmental parameters in risk assessment should be analyzed and taken into account. Two ways to counteract uncertainties would be to utilize probability theory and unclear logic. Community’s attentiveness to risk communication varies across hazard mitigation, emergency preparedness, response and recovery (Fischer 2003)....   [tags: Risk, Risk management, Hazard, Management]

Better Essays
966 words (2.8 pages)

Ethical Issue In Information Systems Essay

- When the internet was considered a global information system in 1995 millions of Americans participated in virtual communication. People began to communicate with each other and personal information began to be placed online by the stroke of the fingertips to their own computer. So the question is the privacy of individuals trusted online. Can people snoop around and see personal information. Of course people can if guidelines are not set in place to protect them. Public and private information can be complex when some individual(s) do not expect their communication to be read outside of their online community....   [tags: Global Information Systems, Internet]

Better Essays
901 words (2.6 pages)

The Issue Of Financial Reform Essay

- Political debate on the merits of financial reform has been at its all-time highest since the Great Depression, with each side calculating whether the benefits of regulation outweigh the costs of limiting risky, but potentially lucrative investments. The core question that these arguments hinge upon asks whether financial crises are preventable. While some purport that crisis is inevitable and therefore any attempts at reform are a moot point, history and empirical data make it clear that government-imposed regulations can alleviate the damage wrought by financial meltdowns and sometimes even avert it completely....   [tags: Investment, Debt, Bank run, Bank]

Better Essays
794 words (2.3 pages)

Adverse Selection And Moral Hazard Problems Essay

- 2. Outline the adverse selection and moral hazard problems that existed in the Euro crisis of 2009. (approx. 2 double spaced pages; 10 marks) Moral Hazard In 1997, Eurozone rules of Stability Growth Pact has outlined Budgetary Discipline to reduce moral hazard and free riding problem. It required all nations in Eurozone to limit its annual deficit and maintain a stable economic growth. Specially, there isn’t bailout permitted. However, some countries never met the debt rules since the very beginning, while others gradually broke the rules, with incentives to take advantages on the alliances and achieve its own development.【一】8 In particular, these countries and their bank take scale of Eu...   [tags: Central bank, Monetary policy, Money supply, Bank]

Better Essays
1458 words (4.2 pages)

Moral Hazard Argument Agains Geoengineering Essays

- ... Geoengineering could have some technical Dependence Hazards as well. We could become dependent upon this geoengineering technology and may never do away with it because we will always need to keep on top of things. If we lose funding climate change could be quick and far worse than it might be if we were ever to allow it to progress. ( Hale, 2012, p 124) Geoengineering only treats the signs and does not fix the core of the problems. “you’re papering over the problem so people can keep incliting damage on the climate system without having to give up fossil fuels” ( Hale, 2012, p 125) An example of this band aid solution is placing a band aid on a patient suffering a heart attack....   [tags: countering climate change]

Better Essays
1246 words (3.6 pages)