In the case of “moral hazard,” the individual words are easy enough to comprehend. But based on how the term was most frequently employed, I sensed that a more specific understanding applied.
My instincts were good. A visit to Wikipedia yielded this result:
Moral hazard is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk.
Moral hazard is a special case of information asymmetry, a situation in which one party in a transaction has more information than another. The party that is insulated from risk generally has more information about its actions and intentions than the party paying for the negative consequences of the risk.
More broadly, moral hazard occurs when the party with more information about its actions or intentions has a tendency or incentive to behave inappropriately from the perspective of the party with less information.
Moral hazard also arises in a principal-agent problem, where one party, called an agent, acts on behalf of another party, called the principal. The agent usually has more information about his or her actions or intentions than the principal does, because the principal usually cannot completely monitor the agent. The agent may have an incentive to act inappropriately (from the viewpoint of the principal) if the interests of the agent and the principal are not aligned.
Fascinating stuff. Although the term appears to have originated in the insurance world, the concepts described above have superb relevance to our political circumstances. In particular, “information asymmetry” and the “principal-agent problem.”
Let’s examine how these concepts might illuminate the offerings and protestations of Rep. Seth Berry relating to “tax reform” and the ensuing citizen initiative. Berry is certainly a beneficiary of information asymmetry; he clearly knows more about the consequences of the proposed legislation than we do.
Berry is “the party that is insulated from risk” and “generally has more information about its actions and intentions” and we are “the party paying for the negative consequences of the risk.” Berry is our “agent,” and we are the “principals” in this debate.
And in Side’s view, Berry, the agent, has ‘an incentive to act inappropriately,’ because the ‘interests of the agent and the principal are not aligned.’ In so many words, Berry’s interest is maximizing state revenue, while taxpayer interest is preserving income free from state confiscation.
In this sense, Berry and his proposals are a “moral hazard.”
Now let’s turn to the huge national debate over “health care reform,” or as it’s become known in response to public reaction, “health insurance reform.”
Generally speaking, when you purchase insurance in the private market, you receive a copy of the policy along with appropriate endorsements. Yeah, I know, they’re page after page of fine print and complicated language, but at least you have them in front of you. You can study them, and if you wish, hire someone else to translate them for you.
Fast forward to the current national policy discussion. What do you think would happen if you asked one of the advocates of the proposed legislation to provide you with a copy of the insurance policy that you would be signing up for?
Surely I jest, you’re probably thinking. Most of the promoters have no clue what the legislation says; they couldn’t understand it if they tried; and they’re not worried about having to sign up for the results. They’ve got theirs, and they’re not going to do anything that puts it at risk. Meanwhile, they’re telling you that a pig in a poke is what’s best for you.
Even Richard Chapin, who I recently mentioned in less than glowing terms, is on to the scam. He writes this in a recent Times Record letter:
“In other words, we are being asked to approve a giant public program with no idea what it is going to cost and no idea where the money to pay for it is going to come from.”
I hereby revise my opinion of Chapin, who, by the way, is a Harvard graduate, on the basis of this statement alone. Maybe they do have coffee out there where he lives.
That aside, I conclude that “moral hazard” as a concept has its highest relevance in the relationship between citizens and their elected “public servants.” There is probably no more perfect example of information asymmetry, nor of misalignment between the interests of we principals and our agents.
So stay alert as you traverse the waters of public policy. It’s the last place you’ll find hazard markers and other aids to navigation.
Moral or otherwise.
No comments:
Post a Comment