Capturing moral hazard: the Scarlet Pimpernel of finance

The Scarlet Pimpernel
Photo: Chronicle/Alamy

Moral hazard is a concept that is strongly associated with banking. It exists when somebody takes a risk and benefits from the outcome while any negative consequences of the outcome are disproportionately borne by somebody else.

Moral hazard exists, for example, when a depositor makes a deposit that is covered by deposit insurance at a risky bank that offers a high rate of interest. It also appears when the chief executive of a bank takes excessive risks to get a high(er) bonus, knowing full

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