What is the concept of moral hazard primarily associated with?

The concept of moral hazard is primarily associated with the tendency towards increased risk. This arises when individuals or entities are insulated from the consequences of their actions, leading them to take more risks than they otherwise might. In the context of insurance, moral hazard occurs when policyholders engage in riskier behavior because they do not bear the full cost of that behavior, thinking that insurance will cover the losses.

For instance, if someone has comprehensive insurance coverage for their home, they may be less vigilant about locking doors or monitoring their property, knowing that any losses can be compensated by the insurer. This shift in behavior due to the perception of reduced personal responsibility exemplifies the core of moral hazard. It emphasizes how insurance can inadvertently encourage riskier behavior among those who are protected, making it a fundamental concern for insurers in evaluating policies and setting premiums.