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.

5 comments:

John said...

I wasn't sure if you were thinking about the uninsured victims of our recent hurricanes. The flooding and devastation have been on my mind for weeks both in anticipation and in the aftermath. Rushworth Kidder talks about dilemma paradigms and I have been trying to use them to figure out what I think about the situation. Your point about moral hazard seems to be that we should consider mercy over justice. I agree with that stance. I also think that we should deal with the short term emergency for individuals to reduce suffering and save the long term discussion for government. Kidder also talks about favoring individuals vs community. I think that helping the community help itself is a better plan. It would seem to improve morale and make people feel more in control of their lives.

https://www.amazon.com/Good-People-Make-Tough-Choices/dp/0061743992

Gruntled said...

I was actually inspired by an old "Hidden Brain" podcast, which I am just getting to, about moral hazard in general. But I have also been reading about conservative resistance to social welfare policies, which rely heavily on moral hazard arguments.

Gary said...

In my lifetime, there has been an explosion of Religious and Political Movements ( Great Society) focusing on the vulnerable. Still yet, our society, on many levels, is getting worse not better.. It seems to me, these lack the answers because they lack the questions.. I was thinking about John Bunyan's book characters Mercy and Justice...

Gruntled said...

The Great Society and New Deal programs greatly improved the condition of the poor and vulnerable among the old, the sick, and the disabled. The proportion of very poor has dropped dramatically in the US and the world. Countries with universal health care have reduced most chronic medical conditions that come from poverty. The world is getting better in most respects, especially with regard to poverty and illness. The US is the exception, in part because we fear helping and increasing the "undeserving poor."

Gary said...

I've been told....there are snakes in the wild that can months without eating- they develop a massive appetite only later to suffocate on their prey because they were so hungry they couldn't breathe..