intenational finance

A moral hazard exists when one party has a responsibility to advance the interests of another, but has an incentive to pursue his or her own interests first (Dowd, 2009), and the pursuit of one compromises the other. Moral hazards are pervasive in business where one party (i.e. management) is tasked to handle the resources of another (i.e, the investor). In financial undertakings, the existence of moral hazard comes in many forms, such as where management pays itself excessive compensation out of the funds it manages on behalf of its investor, or where it makes decisions to take on risks that the other has to bear. Where interests of management and investor are not aligned, then there is a potential for moral hazard.