What is the moral hazard problem? a. The problem that managers of a financial firm will take on riskier investments because they believe the federal government will save them from bankruptcy. b. The problem that managers of a financial firm may have more information about risky investments than the federal government does. c. The problem that managers may experience in distinguishing low-risk borrowers from high-risk borrowers before approving a mortgage.

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Business

Naomi Friedman

8 July, 06:16

What is the moral hazard problem? a. The problem that managers of a financial firm will take on riskier investments because they believe the federal government will save them from bankruptcy. b. The problem that managers of a financial firm may have more information about risky investments than the federal government does. c. The problem that managers may experience in distinguishing low-risk borrowers from high-risk borrowers before approving a mortgage.

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Betty Boop · Answer 1

Moral Hazard occurs when a person increases its exposure to risk because someone else bears the the cost of those risk (Insurance companies)

Explanation:

Moral Hazard usually occurs when their is information asymmetry, the risk taking party has more information than the risk incurring party.

The financial crisis of 2008 is the best example of the Moral Hazard Problem.

The Moral Hazard Problem arises because the managers of the financial firm took over riskier investments because they believed that the federal government will save them from the bankruptcy.