Moral Hazard And Ethical Hazard

1068 WordsJun 17, 20155 Pages
1. Moral Hazard a. Moral hazard is the possibility for an individual to act in a different and detrimental way when working on behalf of another person because they are not properly monitored. Moral hazard can arise from asymmetric information, where one party has more information about a transaction than the other party. For example, a worker is working on behalf of their employer. If that employer does not properly monitor this employee, they may decide to slack on their job, negatively impacting their productivity. The act of slacking is the moral hazard in this situation. 2. Agent a. An agent is a person working on behalf of another person. Using the example above, the employee is the agent of the employer; the employee is doing the…show more content…
This situation can arise when purchasing a used vehicle. A seller may know all of the issues and needed repairs for the vehicle they are selling, but refrains from explaining this to a potential buyer. When that buyer purchases the vehicle, they may find that the vehicle is a lemon or needs extensive repairs, making the purchase an unfavorable one. 5. Signaling a. Signaling is the process of an informed party divulging accurate private information (information they have) to an uninformed second party, in an attempt to solve the issue of asymmetric information and in hopes of reaching some sort of mutually beneficial arrangement (Conjecture Corporation, n.d.). Advertising is an example of signaling: a company may have a well-constructed product they wish to sell to consumers. They use advertising to signal the value and reliability of the product. Consumers see the advertising and decide to purchase the product. Here, the seller receives revenue for the product and the consumer receives some sort of value from its purchase. 6. Screening a. Screening is the process/actions of an uninformed party trying to get an informed party to give them private information. Examples of screening can be seen in buyers asking questions about the products they are going to buy, managers asking questions of potential
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