transaction in his or her favour. Codes of professional ethics and licensing
and certification practices, both governmental and private, are reactions
to concerns about this kind of moral hazard.
Your auto mechanic probably knows far more about cars than you do and
is therefore able to benefit by convincing you to make unnecessary
expenditures. This is an example of moral hazard caused by asymmetric
information. One partial solution to this problem is to get a second (or
third!) estimate before you spend any money.
Helen King/Corbis/Getty Images
Moral hazard can also be created by government policies, especially those
applying to financial institutions. One argument against deposit
insurance, for example, is that the government’s guarantee of individuals’
bank deposits (as provided by the government-owned Canada Deposit
Insurance Corporation) may lead commercial banks to undertake more
risky lending practices than they otherwise would. And in the 2008
financial crisis, when the U.S. government used U.S.$125 billion of
taxpayers’ funds to inject liquidity into several large commercial banks,