Tuesday, September 29, 2009

Moral Hazard's Hazard

Writing in Commentary, James K. Glassman on the hazard of moral hazard:

When someone insures you against the consequences of a nasty event, oddly enough, he raises the incentives for you to behave in a way that will cause the event. So if your diamond ring is insured for $50,000, you are more likely to leave it out of the safe. Economists call this phenomenon “moral hazard,” and if you look around, you will see it everywhere. “With automobile collision insurance, for example, one is more likely to venture forth on an icy night,” writes Harvard economist Richard Zeckhauser. “Federal deposit insurance made S&Ls more willing to take on risky loans. Federally subsidized flood insurance encourages citizens to build homes on flood plains.”

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