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Chapter 2: Q.14 (page 97)

If you are an employer, what kinds of moral hazard problems might you worry about with regard to your employees?

Short Answer

Expert verified

A moral hazard refers to scenarios where an individual has incentives to take actions that lead toward a negative or undesirable outcome for an affiliated party.

Because employees have less of a stake in their employment location than the employer, the damage to image, brand, or property by an employee will hurt the employer more than the employee.

Step by step solution

01

Step 1. Explanation

A moral hazard refers to scenarios where an individual has incentives to take actions that lead toward a negative or undesirable outcome.

This is commonly addressed in insurance policies, where insurance companies won't agree to cover a disastrous outcome unless both parties have an incentive to avoid the disastrous outcome.

Because employees have less of a stake in their employment location than the employer, the damage to image, brand, or property by an employee will hurt the employer more than the employee.

Employees may not consider the full consequences of a potentially risky action on their employment as they are alienated from their labor and have no ownership of their workplace.

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