What term describes a situation in which a party is incentivized to risk causing harm because another party is obligated to remedy the consequences of the harm caused?

What term describes a situation in which a party is incentivized to risk causing harm because another party is obligated to remedy the consequences of the harm caused?

• A. Reciprocity
• B. Committee
• C. Moral Hazard
• D. Leverage

Answer: (C)

The main idea here is how incentives shape behavior when someone else will pick up the costs. Moral hazard describes a situation where one party takes more risk because another party is responsible for remedying the harm or paying for the consequences. In health care, for example, if insurance covers medical costs, a patient or even a provider may engage in riskier behavior or unnecessary care knowing the insurer will bear the expenses. This mismatch between who bears the downside and who takes the risk is what characterizes moral hazard. Reciprocity is about mutual exchange or fairness in giving and getting, which isn’t about risk-taking due to third-party remedies. A committee is a group that deliberates or makes decisions, not a concept about incentive-driven risk. Leverage refers to power or influence used to shape outcomes, rather than the risk-shifting dynamic described here.

The main idea here is how incentives shape behavior when someone else will pick up the costs. Moral hazard describes a situation where one party takes more risk because another party is responsible for remedying the harm or paying for the consequences. In health care, for example, if insurance covers medical costs, a patient or even a provider may engage in riskier behavior or unnecessary care knowing the insurer will bear the expenses. This mismatch between who bears the downside and who takes the risk is what characterizes moral hazard.

Reciprocity is about mutual exchange or fairness in giving and getting, which isn’t about risk-taking due to third-party remedies. A committee is a group that deliberates or makes decisions, not a concept about incentive-driven risk. Leverage refers to power or influence used to shape outcomes, rather than the risk-shifting dynamic described here.