Question

Explain moral hazard and give at least two examples. Discuss its implications as an informational asymmetry problem for financial crises.

Answer 1

Moral hazard means one party take the full risk and full cost incurred full cost on entity or insurance company. To a moral hazard may happened while two different conditions one is Asymmetric information,of two party another one is two party get incentives. That is whenever the first part violate the rule and guidelines of entity or insurance then enth get incentives due to violation of rule. Examples are one is fire insurance. In that case there is a chance of fire the insured goods fired by the first party or building owner. And asymmetric information so that occurred moral hazard. Another one is insured properties there is occured moral hazard

Moral hazard and asymmetric information may create an strong impact on financial crisis. Ok in the case of financial institutions bank loans there is a chance of moral hazard which is occurring due to asymmetric information . Bankers give loan on the expectations regarding loan repayment capasity but sometimes this may not happening. People will not or unable to close the loan. Thus asymmetric information affect the financial crisis.