Moral Hazard

Identify an example of a management scenario from current events involving adverse selection or moral hazard. Discuss some methods with your classmates for correcting the potential problems of the asymmetric information





Moral hazard occurs when one party takes high risk because the other party is bound to take full responsibility for all the consequences that may arise. However, moral hazards create a win-win situation for one party that it can negatively affect an organization. This paper explores the various ways in which employees can alter the vicious cycle of moral hazards in management scenarios.

In the wake of the COVID 19 pandemic, there have been massive layoffs to ensure companies stay afloat. Nonetheless, managers have still retained their jobs. This is primarily because their jobs are guaranteed. After all, they are the primary decision-makers (Havard Business Review, 2020).  They have the power and liberty to make self-serving decisions that will not affect their source of income or their friends’ well-being. If the managers are not held accountable for their actions, they may make bad decisions to satisfy their individuals. Typically the company will endure all the problems and challenges.

From this perspective, it is crucial to redress the growing moral hazards occurring in the management field in the contemporary world of business. Firstly, organizations should set up a governing body to oversee the managers’ activities. As a result, managers will be liable to the board of directors. Through this, the managers will exercise caution in their business dealings. Another promising approach is reducing the occurrence of moral hazard is by reducing the number of managers. Every time a new manager is appointed, there is a legal binding agreement between the manager and the company. Therefore this reduces the chances of a moral hazard occurring. Following this perspective, it is possible to alleviate the flow asymmetric of information between the two parties.

Reference List

Havard Business Review, 2020. How to manage Coronavirus layoffs with Compassion. [Online]
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