Question

What is moral hazard? List three things an employer might do to reduce the severity of this problem. Explain your answers. There should be +6 sentences (75 words) or you will not be given credit.

Answer 1

Moral hazard is a situation in which one party to am agreement engages in risky behavior or fails to act in good faith because it knows that the other party bears the consequence of that behavior.

In micro economics, the term Moral hazard usually used to refer to a situation where the probability of illness, fire,accident etc increases when an individual is insured.This is because the insured person takes less precaution to avoid accidents, fire etc.because with insurance the loss is shifted from the individual to the insurance company.

Moral hazard is huge issue in the business world.

The solutions an employer can adopt to solve this problem are as follows

*Multi period contracts-contracts can be negotiated to obviate employment situations with the potential moral hazard.

*policy- an employer should develop and implement a policy in his employee handbook that prohibits the employee from working for competitors. Such policy would diminish the employee's temptation to use knowledge obtained while employed with the employer to advance their careers with his competitor

*Evaluations- Regular performance evaluations may help to reduce moral hazards as it will keep the employees cautious and grounded.