Moral Hazard
Market Failure: Asymmetric Information
AO2·HL
Syllabus requirement
Occurs when one party takes on excessive risk because they do not bear the full consequences of that risk (e.g. post-contract behavior in insurance).
Assessment objectives
AO2 Application and Analysis
Higher LevelThis topic is assessed at HL.
Summary
Moral hazard occurs when one party can take advantage of a situation because the other party lacks information about their actions, creating opportunities for behavior that would not occur if both parties had the same information. It is an important form of asymmetric information because it can change incentives and lead to outcomes that are inefficient or unfair in markets and contracts.
