Moral hazard originated in the insurance industry where Insurance firms realized that by protecting their customers from risks, they might be encouraging risky behaviors. In cases where there are high potential claims, an insurance firm will charge higher premiums. A moral hazard exists in these situations (Winter 2013):
Lack of shared information: One party may happen to possess more information than the other party. For instance, a company selling investments may be aware that it will not succeed in the next two years based on its performance. Investors investing in the firm due to lack of enough information may think that the company is doing well.
Principal-agent problem: When an agent or insurance broker is not in alignment with the individual it represents, moral hazards can exist. For instance, an insurance agent may recommend a bigger policy if that is the way of getting a special bonus.
In some situations, the membership of the Euro may cause some moral hazards. A country in the community may imagine that if it faces many challenges, the other members will bail it out. For instance, a state may decide to grow its debts knowingly. When Greece joined the Euro, it took advantage of low-interest rates because of its membership in the Euro. The low-interest rates encouraged the country to keep borrowing until it realized too late that the country had borrowed too much. Greece continued to borrow knowing that it enjoyed low interest rates because of its membership in the Euro (Dam & Koetter 2012).
If an individual has not insured his house, it implies that he will suffer losses in case of burglary or fire. An individual will be compelled to be careful by installing burglar alarms and employ guards to evade any unexpected event (Jaspersen & Richter 2015).