A:

Morale hazard is an insurance term used to describe an insured person's attitude about his belongings. It arises when the person does not care about his possessions because he knows he is insured. For example, suppose a person pays insurance for his new phone. Morale hazard arises when the model of his phone becomes outdated and he no longer cares about it. He hopes his phone gets damaged before his insurance period is over so he can receive a new one. He is indifferent to his phone and unconsciously changes his behavior to try to receive a new one.

Moral hazard describes the behavioral changes before or after an event occurs. One type of moral hazard is ex-ante. Ex-ante moral hazard describes the behavioral change of a person or company before an event occurs. For example, suppose Sherman, a professional snowboarder, does not have health insurance and goes through his career without doing difficult tricks that could leave him in the hospital. Sherman knows if he gets injured and has to go to the hospital, he has to pay the bills out-of-pocket. He decides to get health insurance, and once his insurance policy starts, he does difficult tricks and takes on more risk. Sherman, consciously, takes on more risk than before he had insurance because he has reduced his liability.

Ex-post moral hazard refers to the behavior of a party after an event occurs. For example, suppose a person takes out a loan from a bank to start a business. After he receives the loan, he may say his business failed—although it was actually profitable—to get a bailout or tax write-off. This is known as ex-post moral hazard.

Moral hazard describes a conscious change in behavior to try to benefit from an event that occurs. Morale hazard describes an unconscious change in a person's behavior when he is insured.

(For related reading, see: Moral Hazards: A Bump in the Contract Road.)

RELATED FAQS
  1. How does the Affordable Care Act affect moral hazard in the health insurance industry?

    Find out why the Affordable Care Act increases moral hazard in health insurance by pushing consumers farther and farther ... Read Answer >>
  2. How do economists define moral hazard?

    Find out how economists define moral hazard, and learn about some of the most common explanations offered for instances of ... Read Answer >>
  3. What is the difference between a peril and a hazard?

    Learn about the differences between a peril and a hazard and the different classifications of hazards - physical, moral and ... Read Answer >>
  4. What is the difference between a principle agent problem and moral hazard?

    Learn how a principal-agent problem often leads to moral hazards in the context of an agent and principal having different ... Read Answer >>
Related Articles
  1. Small Business

    Moral Hazards: A Bump In The Contract Road

    Learn how this phenomenon can cause a party in an agreement to behave differently than expected.
  2. Insurance

    The History Of Insurance In America

    Insurance was a latecomer to the American landscape, largely due to the country's unknown risks.
  3. Insurance

    4 Common Misconceptions About Homeowners Insurance

    There are many misconceptions about homeowners insurance. These are the most common.
  4. Insurance

    Which States Have the Cheapest Home Insurance?

    You can't choose where you live by its insurance rates. But if you did, these are the states to pick.
  5. Insurance

    Understanding Your Insurance Contract

    Learn how to read one of the most important documents you own, your insurance contract.
  6. Insurance

    Understanding Taxes on Life Insurance Premiums

    Learn about the tax implications of life insurance premiums, including when they might be taxable and whether they are tax deductible.
RELATED TERMS
  1. Hazard Insurance

    Hazard insurance protects a property owner against damage caused ...
  2. Insurable Interest

    An economic stake in an event for which an insurance policy is ...
  3. Risk-Based Deposit Insurance

    Deposit insurance with premiums that reflect how prudently banks ...
  4. Cumulative Exposure

    Exposure to a hazard over an extended period of time.
  5. Nuclear Hazards Clause

    Property insurance policy language that excludes from coverage ...
  6. Contract Theory

    Contract theory is the study of how individuals and businesses ...
Hot Definitions
  1. Return on Assets - ROA

    Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets.
  2. Fibonacci Retracement

    A term used in technical analysis that refers to areas of support (price stops going lower) or resistance (price stops going ...
  3. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  4. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  5. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  6. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
Trading Center