The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Moral Hazard

  • Y. Kotowitz
Reference work entry


The problem of moral hazard is pervasive in economic activities. Economists have been well aware of its existence as the following quote from the Wealth of Nations will testify:

The directors of such companies, however, being the managers rather of other peoples’ money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own … Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company. (Smith 1776, p. 700)

However, theoretical developments and their application to specific problems have only proceeded since the 1960s and are still the subject of vigorous research. While we have a considerable understanding of the problem, we do not as yet understand fully market and social responses to it. In the following I shall attempt to explain the nature of the problem and selectively illustrate the flavour of current theoretical developments.


Adverse selection Agency theory Assignment problems Asymmetric information Contingent contracts Contract enforcement Exclusive contracts Externalities Hidden actions Incomplete contracts Incomplete information Insurance Joint production Law of large numbers Licensing Monitoring Moral hazard Noise Non-cooperative game theory Non-market institutions Opportunistic behaviour Optimal contracts Rationing Reputation Risk aversion Risk sharing Spot markets Transaction price Vertical integration 

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© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Y. Kotowitz
    • 1
  1. 1.