I understand what Moral Hazard is (people taking risks because they won’t be the ones paying the costs if it goes badly), but I don’t understand what it has to do with Asymmetric/Imperfect Information
In: Economics
Another fairly common area is in investments. If you leave your money with an investment professional to invest with commissions based on the investment performance (think investment banks who trade their own and potentially client’s monies and give their star traders huge bonuses) The individual traders get rewarded for taking more risks to achieve a higher return but the downside is paid by the bank/client. You or the bank, frequently cannot subject every trade decision to scrutiny and rely on the trader’s greater knowledge of the market.
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