moral hazard

Definition

The risk that the presence of a contract will affect on the behavior of one or more parties. The classic example is in the insurance industry, where coverage against a loss might increase the risk-taking behavior of the insured.

Use moral hazard in a sentence

You need to try and make sure that there is not a moral hazard that stands in the way of closing a deal.

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The executive officer of the company started base jumping after the new insurance contract was signed in spite of the moral hazard clause.

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Many people criticized the federal government's decision to provide bailouts to banks with risky mortgage lending practices as creating a moral hazard that would continue to encourage these practices.

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