On Nov 29, 2007 6:59 PM, Michael Perelman <[EMAIL PROTECTED]> wrote: > Moral hazard came from the insurance industry. For example, because you have > insurance, you may have less incentive to drive carefully.
And insurance companies have ways of dealing with this by use of deductibles, increased premiums etc. The issue is not so much that financial players have insurance against loss. The issue is that they are not paying for the insurance. So I'd argue for a more generalized view of moral hazard to understand the way it applies in financial markets. e.g. Northern Rock did not have insurance to start with. They still (arguably) behaved irresponsibly and retroactively got the insurance for free. In other words, Northern Rock got to enjoy the benefits of an insurance policy without bothering to pay for it. And that is the essence of the moral hazard problem where someone gets a valuable consideration without paying for it. -raghu.
