moral hazard: meaning, definition, pronunciation and examples
C1/C2Formal/Academic/Technical
Quick answer
What does “moral hazard” mean?
A situation where one party is incentivized to take greater risks because they are shielded from the negative consequences, typically because another party bears the cost.
Audio
Pronunciation
Definition
Meaning and Definition
A situation where one party is incentivized to take greater risks because they are shielded from the negative consequences, typically because another party bears the cost.
In economics, insurance, and finance, the phenomenon where the presence of a contract or arrangement changes behavior, often detrimentally, by reducing the incentive to avoid risk. In broader contexts, it refers to any scenario where protection from repercussions encourages irresponsible conduct.
Dialectal Variation
British vs American Usage
Differences
No significant differences in definition or usage. The term is used identically in economics and policy discourse.
Connotations
Neutral-technical in both. Implies a critique of institutional design or incentive structures.
Frequency
Slightly more frequent in US financial and public policy media due to larger financial sector discourse, but common in UK academic and economic contexts.
Grammar
How to Use “moral hazard” in a Sentence
[Policy/Insurance] creates/increases/exacerbates moral hazardMoral hazard arises/occurs when [condition]To mitigate/address/tackle the moral hazard of [situation]Vocabulary
Collocations
Examples
Examples of “moral hazard” in a Sentence
verb
British English
- The policy could moral-hazard the banks into riskier behaviour.
- Governments must avoid programmes that moral-hazard the market.
American English
- The bailout might moral-hazard the industry.
- We shouldn't moral-hazard investors with guarantees.
adverb
British English
- The system is structured moral-hazardly.
- They acted almost moral-hazardly.
American English
- The market reacted moral-hazardly to the news.
- The incentives are designed moral-hazardly.
adjective
British English
- The scheme had significant moral-hazard implications.
- They discussed the moral-hazard effects.
American English
- It's a moral-hazard situation.
- The moral-hazard problem is acute.
Usage
Meaning in Context
Business
Discussing corporate bailouts, executive compensation tied to short-term gains, or poorly designed insurance policies.
Academic
Analysing principal-agent problems in economics, game theory, or public policy design.
Everyday
Rare. Possibly in discussions about bank bailouts or 'too big to fail' companies.
Technical
Central term in economics (especially contract theory), insurance underwriting, financial regulation, and risk management.
Vocabulary
Synonyms of “moral hazard”
Strong
Neutral
Weak
Vocabulary
Antonyms of “moral hazard”
Watch out
Common Mistakes When Using “moral hazard”
- Using it to describe a person ('He is a moral hazard'). It describes a situation. / Confusing it with a 'moral *dilemma*' (a choice between two ethical options). / Using plural ('moral hazards') is uncommon but acceptable when discussing multiple distinct scenarios.
FAQ
Frequently Asked Questions
The term originated in the insurance industry in the 17th century, referring to the increased risk posed by the insured's dishonesty or carelessness. It was later adopted by economists in the mid-20th century to describe incentive problems more broadly.
Not directly. While the word 'moral' is used, the term is primarily economic and behavioural. It refers to the distortion of incentives leading to increased risk-taking, not necessarily to an ethical failing of an individual's character.
No. It is incorrect to label a person as 'a moral hazard'. The term describes a situation, condition, or set of incentives. You can say a person 'creates', 'faces', or 'is subject to' moral hazard.
Both are information asymmetries. Moral hazard occurs AFTER an agreement is made, when one party changes behaviour because they are protected from risk. Adverse selection occurs BEFORE an agreement, when one party has more information (e.g., about their own risk) than the other, leading to a market of disproportionately high-risk participants.
A situation where one party is incentivized to take greater risks because they are shielded from the negative consequences, typically because another party bears the cost.
Moral hazard is usually formal/academic/technical in register.
Moral hazard: in British English it is pronounced /ˌmɒr.əl ˈhæz.əd/, and in American English it is pronounced /ˌmɔːr.əl ˈhæz.ɚd/. Tap the audio buttons above to hear it.
Phrases
Idioms & Phrases
- “[It's a] classic case of moral hazard.”
- “Bailing them out creates moral hazard.”
Learning
Memory Aids
Mnemonic
Think of 'MORAL HAZARD' as 'MORe risk ALways taken when you're HAZARD-proof' – protected from danger, you act more dangerously.
Conceptual Metaphor
A SAFETY NET THAT ENCOURAGES WALKING THE TIGHTROPE.
Practice
Quiz
In which scenario is 'moral hazard' LEAST likely to be discussed?