Corporate Governance
Intermediate
Moral Hazard
A problem that arises when one party's unobservable action affects another party's payoff after a contract or relationship has been formed.
Why It Matters
Moral hazard underlies executive compensation, board monitoring, fiduciary duties, creditor protections, and prudential regulation of risk-taking institutions.
Selected Literature
A short list of directly relevant archive entries.
1972
Introductory
Production, Information Costs, and Economic Organization
Armen A. Alchian and Harold Demsetz
American Economic Review
1976
Introductory
Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure
Michael C. Jensen and William H. Meckling
Journal of Financial Economics
1979
Advanced
1980
Advanced
Related Cases
1986
Financial Law
FDIC v. Philadelphia Gear Corp.
476 U.S. 426 (1986)
Whether an unfunded standby letter of credit backed by a contingent promissory note creates an insured deposit.
1939
Corporate Law
Guth v. Loft, Inc.
5 A.2d 503 (Del. 1939)
Duty of loyalty and a corporate officer's appropriation of an opportunity connected to the corporation's business and resources.
1963
Securities Regulation
SEC v. Capital Gains Research Bureau, Inc.
375 U.S. 180 (1963)
Whether an investment adviser's undisclosed practice of trading before and after its recommendations could be enjoined under the Investment Advisers Act.
1988
Corporate Law
Blasius Industries, Inc. v. Atlas Corp.
564 A.2d 651 (Del. Ch. 1988)
Board action taken for the primary purpose of interfering with shareholder voting power.