Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
Yes, they talk about moral hazard as it supposedly relates to business, while ignoring the intra-business moral hazard. From wiki:
Moral hazard is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk. Moral hazard arises because an individual or institution does not bear the full consequences of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to bear some responsibility for the consequences of those actions. For example, an individual with insurance against automobile theft may be less vigilant about locking his car, because the negative consequences of automobile theft are (partially) borne by the insurance company.

Moral hazard is related to asymmetric information, a situation in which one party in a transaction has more information than another. The party that is insulated from risk generally has more information about its actions and intentions than the party paying for the negative consequences of the risk. More broadly, moral hazard occurs when the party with more information about its actions or intentions has a tendency or incentive to behave inappropriately from the perspective of the party with less information.

A special case of moral hazard is called a principal-agent problem, where one party, called an agent, acts on behalf of another party, called the principal. The agent usually has more information about his actions or intentions than the principal does, because the principal usually cannot perfectly monitor the agent. The agent may have an incentive to act inappropriately (from the view of the principal) if the interests of the agent and the principal are not aligned.

There is a principal-agent problem in business. That is exactly what you are describing. So you do not disagree with the concept of moral hazard, but rather with the way in which the concept is being applied. Foundational criticism would have to go a bit deeper.

You also underestimate the awareness in ET of the current 'discussion' in the US on financial matters, we had a stream of diaries on that.

by nanne (zwaerdenmaecker@gmail.com) on Mon Apr 14th, 2008 at 06:19:29 PM EST
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