Beyond Labels

A 360° Discussion of Foreign, National and Local Policy Issues

9/24: How Should “Moral Hazards” be Managed?

As our society becomes more interconnected, while also being more impersonal, the risk of “moral hazard” (click here for a Wikipedia tutorial) abounds. I don’t often agree with Paul Krugman, but here’s his one-clause definition, from the Wikipedia article:  moral hazard is “any situation in which one person makes the decision about how much risk to take, while someone else bears the cost if things go badly.”

[As the Wikipedia article notes, in modern usage, the “moral” in “moral hazard” does not necessarily imply immoral behavior or fraud, but rather two parties acting rationally given the information they possess and the incentives they perceive.]

I hope that we’ll spend the meeting identifying “moral hazard” situations in current policy debates and discuss the following:

  • Is there realistically a moral hazard in the situation, or is it only a remote, theoretical risk?
  • What are the risks of concern?
  • If there is moral hazard, what should be done to manage that risk?

Here are some possible “moral hazard” areas to start us off:

Health insurance

In this case, the potential moral hazard risk is that, with health insurance (private, Medicare, Medicaid, free care, other) separating 1) who pays the actual cost of prevention/treatment from 2) the patient directly benefiting from the prevention/treatment, patients may pursue riskier, less healthy lifestyles than would otherwise be the case.

From a NIH meta-study on “Financial incentives for a healthy life style…“:

Major health problems affecting today’s societies, such as chronic diseases, are largely preventable and possible to restrain through healthy lifestyle and early detection. However, people sometimes neglect preventive measures and engage in unhealthy habits such as smoking, alcohol abuse or sedentary lifestyle. Thus, policy makers, health insurers and employers all over the world, seek effective approaches to promote a healthy behavior and to stimulate the use of preventive services among the population, as means of reducing health costs and increasing employee’s productivity.

What, if anything, should be done to address this risk?

Bank bail-outs

While there are some long-standing bank/deposit insurance schemes (like FDIC) and similar ones for other customer-facing securities firms (SIPC), the bank bailouts in the face of the market disruptions of 2008/09 went well beyond these programs. Moral hazard, in the sense of banks pursuing riskier businesses based on an expectation that they’d be bailed out if they bet wrong (under certain circumstances), was a big topic of the day. Hence, Dodd-Frank and the Volcker Rule.

Are these rules enough? Are they too much? How should non-consumer-facing financial institutions’ risk profile be managed?

Charity: Hand-up or hand-out?

Charitable and welfare programs are often asked (or ask themselves) whether they are providing short-term, transitional assistance or whether they are fostering a culture of long-term dependence, the so-called “Samaritan’s dilemma.”

And more…

I encourage all participants to think of other “moral hazard” situations for us to discuss.

I’ll be late to tomorrow’s meeting; hopefully you won’t exhaust the topic before I arrive!

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