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            | Topic: | 
            
                
                    Business
                
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            | Number of pages / Number of words: | 
            
                6 / 1663             | 
        
                
    
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Moral hazard is the situation where one party to a contract has an incentive to act in a manner that benefits itself but at the expense of the other party, after the contract is agreed. One of the best examples of moral hazard is when somebody takes out insurance against fire damage. If the premiums reflect the average threat of fire, there can be incentive for the insured to be less cautious and sometimes even deliberately cause a fire...
        
        
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If the premiums reflect the average threat of fire, there can be incentive for the insured to be less cautious and sometimes even deliberately cause a fire. Another example of moral hazard is that of the principal-agent problem. In this case the manager of a firm has a hidden action, his/her effort at work...
        
        
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            General points of the essay
            
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