Paragas, Gene Kenneth B.

BSA 1-D 5:00-6:50

ECON 107

1. Moral Hazards is a risk that someone takes because they know someone else will pay the
consequences of that risk. It is the tendency for individuals and organizations to behave
inefficiently when they are able to transfer the risk to a third party. This means that, once
insured against the risk, the insured party may take risks that they would not take if they
had to bear the full cost associated with any loss. In short, being insured against a risk
may encourage individuals to take risks which they would not otherwise take. For a
moral hazard to happen there should be an exchange and agreement between two parties
and one party should have more information than the other.
2. Example of the moral hazards in the business world is:

 Most common are insurance, for example a car insurance, a driver who has
insurance may be confident about his driving because he knows that the insurance
company will pay for any damage the driver would incur
 Another example is employee's incentives where if an employee is guaranteed a
salary not based on performance and sales then that employee may not exert much
effort into his job because he knows he can receive his pay no matter what he
does.

3. The Moral Hazards in the economy affecting bank and financial institutions are:

 The financial crisis of 2008/09 which led to many banks/large financial

institutions to run short of liquidity. In the UK and US, governments intervened
offering large-scale bailouts. These bailouts executed at the expense of taxpayers
presented a huge moral hazard situation in which the willingness of the
government to bailout their companies sent a message to executives at large
corporations that any economic costs from engaging in excessively risky business
activities (in order to increase their profits) would be shouldered by someone
other than themselves.
 the collateralization of questionable assets wherein banks were offered the
opportunity to offload a bad loan, bundled with good loans, in a secondary market
through collateralized loans, thus passing on the risk of default to the buyer.
Essentially, banks underwrote loans with the expectation that another party would
likely bear the risk of default, creating a moral hazard and eventually contributing
to the mortgage crisis.

4. Example of Moral Hazards we can connect to the COVID pandemic would be:

 The implementation of the GCQ where people are really confident to go outside
amidst the pandemic wherein they think their area doesn’t have cases or aren’t
affected at all and if they may be infected then they are not the ones to to suffer
the cost but it is their parents or guardian and the hospital to treat if ever.
 The current situation of some of our workers in which they are paid but they can
exert less effort because of the limited capacity and few customers. A worker may
feel relaxed because they know that they are paid while only doing tasks at a
lesser effort .