Moral Hazard
When someone else bears the cost of your risk, you take more of it; insurance, guarantees, bailouts and 'the company will cover it' all change behaviour, and counterparts design deals so you carry the hazard.
An everyday example
An agency on a fixed fee proposing the ambitious campaign; a contractor on time-and-materials discovering complications.
What it can cost you
Being the party who bears the downside of someone else's decisions; or creating hazards in your own incentive design.
Warning signs
- They decide and I pay.
- I am taking risks I would not take with my own money.
One thing to do
For any arrangement, trace who decides and who pays if it goes wrong; align them with skin in the game.
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