Moral Hazards
Full paper available upon request

Paper originally presented in the Philosophy Department at the University of Colorado, Boulder
Working Paper Series, November 18, 2005

Also presented in a variant form, with an elaborate slideshow, as a job talk in 2007 at:

Abstract: A 'moral hazard' is a market failure most commonly associated with insurance, but also associated by extension with a wide variety of public policy scenarios, from unemployment insurance, to corporate bailouts, to health insurance, to environmental disaster relief. Specifically, the term 'moral hazard' describes the danger that, in the face of insurance, an agent will increase her exposure to risk. Such terminology invokes a moral notion, suggesting that changing one’s exposure to risk after becoming insured is morally problematic. This paper challenges that position. It argues that there is nothing endogenously moral about the moral hazard. It does so by arguing against three proposed claims regarding the wrongness of the moral hazard: first the view that conceives of it as deception; then the view that conceives of it as cheating; and finally the view that conceives of it as stealing.

Introduction

By the time the outer bands of Hurricane Katrina brushed the banks of the Gulf Shore like so many tentacles of an automated car wash sponge, the National Weather Service was already anticipating that the storm would be a disaster. Predictions were ominous. Reporters explained that the city of New Orleans had been built in a “bowl,” and that if the retaining walls or levees that held the water back were to fail, the city would be sunk. As the story is now legend, most know that such prognostications eventually did come to pass. Billions of dollars were flushed into the Gulf of Mexico, and hundreds of thousands of people found themselves or their loved ones suddenly homeless, unemployed, or dead. It didn’t take long before commentators began to question the wisdom of rebuilding a sub-sea-level city in the path of hurricanes; and then, of course, it wasn’t long after that that they began to question the wisdom of ever building on the coast in the first place.

What circulated in the background of this discussion was a concern about what is sometimes called the “moral hazard”—the tendency of insured parties to assume risks that they would not otherwise assume. In the case of Hurricane Katrina, some took the position that building levees to hold back the floodwaters of the Gulf created “bad” incentives for citizens to build in areas that would otherwise make undesirable nesting sites. More than this, some argued that the tragedy was made extra-tragic because the citizens of the Gulf were irresponsible—too reliant on the government to rescue them.[1] Whether regarding the bailouts of the Federal Emergency Management Agency (FEMA), the construction of levees around New Orleans, or even the provision of flood insurance, many policy analysts are concerned that provision of such insurance induces actors to behave in a way discordant with individual utility schedules.

One thing that should be clear about the terminology of the ‘moral hazard’ is that the language invokes a normative notion. It suggests that there is a moral danger, a moral problem, associated with the provision (or the overprovision) of insurance. It is true that the existence of social programs like federal emergency response teams, levee construction, flood insurance, and so on, create incentives for people to do things that they might otherwise not. This is an economic fact about insurance. What is hazier is whether there are true moral complications of changing one’s behavior in the face of insurance. In this paper I argue that there is nothing endogenously moral about the moral hazard.[2]

The strategy that I employ involves giving arguments against three of the primary claims that one might make regarding the alleged immorality of the moral hazard. I devote the first portion of the paper, however, to a discussion of the meaning of the moral hazard and its use in public discourse. The first section (§ I.) attempts to give a background on the moral hazard and to define it; where the second section (§II.) gives some background on insurance and risk. I devote the remainder (and the bulk) of the paper, §III. – §V., to address conceptions of the moral hazard that might incriminate it as endogenously immoral. In §III. I seek to address claims that the moral hazard is problematic because it involves lying or deception. Then I address in §IV. claims that the moral hazard is problematic because it involves cheating. And finally, in §V., I address claims that the moral hazard it is problematic because it involves stealing or taking from others.

[For a full version of the paper, shoot me an e-mail]

[1] John Stossell, for instance, argued this point on Fox News immediately following the Katrina disaster. He argues a similar point in his article, John Stossell, Confessions of a Welfare Queen (2004 [cited August 14, 2006]); available from http://www.reason.com/0403/fe.js.confessions.shtml

[2] I am using the term ‘endogenously moral’ here to mean ‘intrinsically moral’ or what is sometimes called ‘prima facie moral.’ I use the term ‘endogenous’ over the term ‘prima facie’ or ‘intrinsic’ because there is a good deal of confusion about the use of ‘prima facie’ in philosophy; because the term ‘intrinsic’ carries with it some complications associated with naturalness and inherentness; and because the term ‘endogenous’ is a common term in economics used to refer to variables within a modeled system. On confusions stemming from the use of the term ‘prima facie’ in philosophy, see John R. Searle, "Prima Facie Obligations," in Practical Reasoning, ed. Joseph Raz (Oxford: Oxford University Press, 1978).