First define moral hazard and provide a specific example. Then, discuss what you believe should be the government's role pertaining to this subject.

Moral hazard is a term describing how behavior changes when people are protected and/or insulated from losses (Thoma, 2013). According to Professor Ben Polak, in moral hazard, the agent(s) has incentives to do things that are not in the interest of the principal, that is, their interests are not aligned; for example instances involving the individual and insurance companies’ relationship, where the individual because there is insurance coverage takes part in risky behavior, which is the classic example of moral hazard (2009)

“At the root of moral hazard is unbalanced or asymmetric information. The party taking risks in a transaction has more information about the situation or intentions than does the party that suffers any resulting consequences”(Maverick, 201

In instances of government and finance industries’ relationship, government securing the position of risk-taking and lax manager against losses; creates, maintains and promotes a moral hazard type situation.

This means finance CEOs are less risk averse, what comes to mind is the confidence instilled by the assurance of government bailout(s), ie the precedent set by the magnitude and frequency of the bailouts in years 2008 and 2009 could well render obsolete any restrain the next time around when there is a financial (Stein, 2009)

If government were to continue on this tandem, will CEOs bother calculating risks versus returns in decision making or will these Managers will get drunk on moral hazard and the safety net provided.

To prevent abuse of moral hazard, there are various ways: 1. The wordings/construct of contract(s) is the best way available for organizations like insurance companies, so as to ensure individuals take less risk by taking a deductible, B. even for venture capitalist who can use contracts to put restrictions on spending of capital put into venture (Polak): 2. through laws, for example bankruptcy law prevents indiscriminate loans between banks and customers, Dodd-Frank financial reform law-2010  in which large, systemically important banks must have plans drawn in advance for an orderly resolution should they get in trouble, as the government and parastatal will allow the large banks to fail and this resolution will be activated and the managers responsible will be fired: 3. through regulation, Federal Deposit Insurance Corp. Improvement Act (FDICIA) theoretically restrict activities of deteriorating financial institutions, review them more often, allocate additional staff(Stern); Sarbanes-Oxley Act etcetera

Bottomline is that when risk protection is assured humans have a tendency to not only take risks, but take bigger risks than will normally be taken. Hence the simplest action the government can take is to redistribute the liability structure in risks taken by companies, not partial liability like co-pay in health insurance companies, but where the upper echelon of management gets to pay a bulk if not all of the losses, knowing this, companies will learn to take extra caution to make risky choices knowing government will not be available to bailout. This is not to say, the rules should be absolute and drastic, policies should be expected to get slowly and eventually encompassing, that moral hazard will be reduced till complete eradication without going against human nature.

Reference

Bernstein, P. L. (2009). The Moral Hazard Economy. Harvard Business Review. Retrieved from https://hbr.org/2009/07/the-moral-hazard-economy/

Maverick, J. B. ( ). What Are The Most Effective Ways To Reduce Moral Hazard?Retrieved from https://www.investopedia.com/ask/answers/042715/what-are-most-effective-ways-reduce-moral-hazard.asp

Polak, B. (2009). Lecture on Sequential Games: Moral Hazard Incentives And Hungry Lions. Yale University. Retrieved from https://oyc.yale.edu/economics/econ-159/lecture-13

Stern, G. (2009). Managing Moral Hazard With Market Signals: How Regulation Should Change With Banking. Retrieved from https://www.minneapolisfed.org/publications/the-region/managing-moral-hazard-with-market-signals-how-regulation-should-change-with-banking

Thoma, M. (2013). Explainer: What is "moral hazard"? Retrieved from https://www.cbsnews.com/news/explainer-moral-hazard/