Thursday, September 14, 2017
When Faced With Moral Hazard, Err On the Side of the Innocent
Moral hazard is the idea that, if you insure against some hazard, the insured will act in an even riskier way, knowing they are insured. Economists usually just focus on the economic costs of changing the balance of risk.
The moral part of moral hazard, though, is that people will behave worse than they otherwise would if we, collectively, try to protect people against bad actions.
This has led some people to harden there hearts - if we have no social insurance, then everyone will behave better because they are on their own.
Yet this runs the risk of hurting people who are hurt through no fault of their own. It is to take care of the vulnerable that we create social insurance in the first place.
So which side should we err on -- taking care of the injured innocent, or promoting the risky guilty?
Personalism - treating everyone as a worthy person - says we err on the side of protecting the innocent, even at the cost of producing some more bad behavior than we otherwise would have.