Question

When one party to a transaction has incentives to engage in activities detrimental to the other party, there exists a problem of:________A) Moral hazard.B) Split incentives.C) Ex ante shirking.D) Pre-contractual opportunism.

Answer 1

Answer: Moral hazard

Explanation: As per economic principles, if an individual increases the exposure to risk when covered by insurance, moral hazard happens, particularly when an individual takes further risks just because someone carries the burden of all those consequences.

There can be a moral hazard at which one party's policies may modify to the disadvantage of someone else after a business transaction has occurred. Moral hazard may arise through a type of asymmetric information in which the threat-taking group to trade is more aware of its motives than the person bearing the risk's implications.

Thus, from the above we can conclude that the correct option is A .