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Line 1: − A moral hazard is when insurance has an effect of encouraging the person benefiting from the insurance to allow an increased risk of loss.+ − For example, a person who purchases full insurance on a rental car, protecting against all dents and scrapes of any kind, is less likely to take good care of the car because he knows that he will not have to pay for any damage to it.+ + − Moral hazards have a circular effect in increasing the cost of insurance due to greater losses than would occur in the absence of insurance.+ + + + + + + + + + + + + + + + + + + + +
Expansion and rewrite. Explaining this is a pain, but I think it's okay. I tried to explain it with an eye on the costs for the individual instead of leaving things to intuition.
In [[economics]], the term '''moral hazard''' refers to the observable fact that people will act differently if the risk of their actions has been moved to another participant.
==The costs of good luck and bad luck==
[[Insurance]]s shift the risk (in part or fully) of bad luck away from the individual. Of course, this willingness to take the risk comes at a price.
For the insured individual, this means two things:
#Having ''good'' luck is now associated with costs: If nothing happens, the individual paid the insurance fees for nothing.
#At the same time, the cost of having ''bad'' luck changed: If an insurance pays $900 in the case of an accident with $1000, the cost of the accident (in the eyes of the individual) sinks to $100.
Assuming that individuals act with their own benefit in mind, this change in costs will lead to a change in behavior.
===An example===
A person who purchased full insurance on a rental car (protecting it against all dents and scrapes of any kind) is less likely to take good care of the car because he knows that he will not have to pay for any damage to it.
In this case, the cost of bad luck and the cost of good luck are the same: Whatever the person paid for the insurance. Thus, the [[incentive]] to be careful is quite low (a person may still feel guilty, fear being regarded as a bad driver by his friends, etc.).
==Circular effects in costs==
The presence of these moral hazards leads to an increase of insurance costs due to greater losses than would occur in the absence of insurance. Of course, this increase in costs leads to a change in the reasoning of the individual, moving the costs of good luck and bad luck closer together and thus lowering the incentive to avoid accidents.
==See also==
*[[Adverse selection]]
==External links==
*[http://ingrimayne.com/econ/RiskExclusion/Risk.html Moral Hazard and Adverse Selection] by Robert Schenk
[[category:economics]]