Moral hazard and its cost

Due to information asymmetry, moral hazard is very common in the real world. Moral hazard means under many circumstances, the outcomes will benefit one party but be very inefficient. The inefficiency is the cost of moral hazard. Sometimes, if we are willing to pay a certain price, it is possible for us to lower the probability of moral hazard. The additional price we pay for lowering the probability of moral hazard is also the cost of moral hazard. Most of the regulations and laws are made to avoid moral hazard issues, or to punish those who take ill actions. 

From this point of view, we can see a huge amount of resources including labour resource have been spent on the issue of moral hazard. Considering the cost, especially the opportunity cost of the moral hazard issue, the cost is incredible. This is one of the reasons that why the blockchain technology has been attracted so much attention as the blockchain technology can potentially solve the problem of information asymmetry. Of course, blockchain cannot solve the issue of moral hazard completely.

We have invented so many things to counter the issue of moral hazard. To some degree, even the government is an institution to counter the moral hazard issue. Some of the tools that we invented for countering moral hazard have grown to incredible sizes that we cannot erase their existences even when we no longer face the moral hazard issue. The enormous institutions would become the burden that slow down our development in the future.