Lecture on Moral Hazard

Moral Hazard the form of post-contractual opportunism that arises because actions that have efficiency consequences are not freely observable and so the person taking them may choose to pursue his or her private interests at others expense. The term originated in the insurance industry, where the tendency of people was observed to change their behavior in a way that led to larger claims against the insurance company (e.g., being lax about taking precautions to avoid or minimize losses.)