Economics Game Theory Questions
Moral hazard in game theory refers to the situation where one party, typically the agent, has an incentive to take risks or engage in undesirable behavior because they do not bear the full consequences of their actions. This occurs when there is a lack of information or monitoring by the principal, who is the other party involved. The agent may exploit this information asymmetry to their advantage, knowing that they can shift the costs or negative outcomes onto the principal. This concept is particularly relevant in situations where there is a principal-agent relationship, such as in contracts, insurance, or financial transactions. Moral hazard can lead to inefficiencies and suboptimal outcomes, as it distorts incentives and can result in excessive risk-taking or moral laxity.