Regardless of whether one agrees with the rationale behind Wikileaks‘ release of thousands of diplomatic cables, one certainty is that their appearance has opened a necessary debate on moral hazard’s in our own democracy.

Manifesting Moral Hazard

Information Asymmetry is an important concept, usually noted in transactional situations, where one party has more (or better) information than another- creating an imbalance of power (or influence) in a transaction- affecting the outcome.  “Moral Hazard” is a particular type of information asymmetry which deals (predominantly) with risk.  A Moral Hazard occurs “…if a party that is insulated from risk has more information about its actions and intentions than the party paying for the negative consequences of the risk“.  We first explored this looking at “The Moral Hazard of Short Term Attitudes” in financial markets, but in day-to-day life you could draw paradigm from an individual who takes less care over a hire-car because any negative consequences of a crash are the responsibility of the hire company (and its insurers). Continue reading →