Solutions to Moral Hazards

Moral Hazards occur when a person or a group of people having more information tends to change its behavior or has an incentive to behave inappropriately from the perspective of the party with less information. Moral hazards mainly arise due to asymmetric information in the market. 

The Government has a meaningful role in attempting to remove asymmetric information flow in the market, and has come up with several solutions.

        1. Several regulations have been passed by the Government in order to maintain parity in terms of quality of product offering to consumers. Sectors like Banking and telecom services are regulated.

2.      2. The government has tried to provide information to consumers or force producers to provide information, so as to protect consumer interest; an example of this being displaying the MRP on product packing, so the consumer is aware what the right price of the product is and the retailer does not overcharge the consumer.

3.      3. Licensing has been made mandatory for professionals in a number of industries in several countries as a proof of competency. This can be seen in insurance sector, where insurance agents are required to be licensed in order for them to advise consumers on the right policy for them. 

The following video explains solutions to moral hazards independent of government activities.

Review sites such as Tripadvisor and ecommerce websites with customer feedback as discussed in the video, help inform consumers about their real experience with the product and its features. Social media as well plays an important part as a solution to asymmetric information.

Review sites help solve moral hazards by both balancing the information between buyer and seller and reducing the incentives for the more informed party from exploiting the other. 

However, review sites have their limitation, for companies have discovered a way to manipulate the comments and post only positive feedback. Therefore, it is seen that although solutions can curb or reduce moral hazards, it cannot completely remove asymmetric information from the market.

 Citations:

1.      Tragakes, Ellie. "Market Failure." Economics for the IB Diploma. Cambridge: Cambridge UP, 2009. 124-30. Print.

2.      "Moral Hazard Definition | Investopedia." Investopedia. Investopedia, 24 Nov. 2003. Web. 10 Jan. 2016. <http://www.investopedia.com/terms/m/moralhazard.asp>.

3.      https://www.youtube.com/watch?v=6faL76QZ2AA

-Anvita Diwan