Moral Hazard
Plain definition
Moral hazard is the tendency for people to take greater risks when they are protected from the consequences — typically after insurance or a guarantee is in place.
In economics
It is the post-contract side of asymmetric information: hidden actions. Insurers counter it with deductibles, co-pays, and monitoring; lenders use collateral. The term also applies to bank bailouts encouraging risky lending.
Example
A driver with full comprehensive coverage may park carelessly or skip maintenance because the insurer bears most of the cost of damage.
Common confusion
Moral hazard is not about immorality; it is about changed incentives after a deal, unlike adverse selection, which is about hidden information before the deal.