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Moral Hazard


Moral Hazard in economics refers to a situation in which economic agents undertake private actions with stochastic effects on final outcomes. Notice that I have highlighted “private” and “stochastic”. Corruption is an example of moral hazard. Public officials can undertake actions which are not observable by the public or they are not verifiable to the courts. The fact that they are not deterministic (in other words because the public cannot tell if unfavorable events are due to inaduequate actions by public officials or due to random, probabilistic events) can make it virtually impossible to make a case against these agents. The actions of these agents can provide private benefits to them. Has moral hazard and the associated corruption played a significant role in shaping up Greece’s economic woes?

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