what is moral hazard 
moral hazard is the risk that a party has not entered into a contract in good faith or has provided misleading information about its assets liabilities or credit capacity in addition moral hazard also may mean a party has an incentive to take unusual risks in a desperate attempt to earn a profit before the contract settles moral hazards can be present anytime two parties come into agreement with one another each party in a contract may have the opportunity to gain from acting contrary to the principles laid out by the agreement anytime a party in an agreement does not have to suffer the potential consequences of a risk the likelihood of a moral hazard increases investopedia sydney burnsunderstanding moral hazarda moral hazard occurs when one party in a transaction has the opportunity to assume additional risks that negatively affect the other party the decision is based not on what is considered right but on what provides the highest level of benefit hence the reference to morality this can apply to activities within the financial industry such as with the contract between a borrower and a lender in addition to the insurance industry for example when a property owner obtains insurance on a property the contract is based on the idea that the property owner will avoid situations that may damage the property the moral hazard exists that the property owner because of the availability of the insurance may be less inclined to protect the property since the payment from an insurance company lessens the burden on the property owner in case of a disaster moral hazards can exist in employer employee relationships as well if an employee has a company car for which they do not have to pay for repairs or maintenance the employee might be less likely to be careful and more likely to take risks with the vehicle 