Is anyone familiar with economics? I've got a few questions here:
1/ What is "moral hazard" all about? I wiki'd it and it mentioned something about "assymetric information", but what "information" are they talking about? How exactly does that cause one party to act to the detriment of the other?
2/ What is the distinction between a hold-out and a free-rider?
I don't know the answer to number 2, but I did a little research on Moral Hazard. I wiki'd it also and I think I can explain it...
Moral Hazard basically refers to the idea that people will take more risks when they are not responsible for the consequences of that risk. Most of the examples I've seen are used in insurance.
For example, let's say I have insurance that protects my house in the event of robbery. This means that the insurance company has to pay all the damages if my house gets robbed. In other words, the insurance company is responsible for this risk. Because I have this insurance, I sometimes forget to lock my door when I go out.
If I did not have insurance, I would be responsible for the risk myself, and I would probably be a lot more cautious and never forget to lock my door. This is moral hazard because I act one way when I'm not responsible for the risk and another way when I am responsible for the same risk.
There are 2 parties here: me and the insurance company. When I don't lock my door (whether this is on purpose or I forget is irrelevant), my action is detrimental to the insurance company because it significantly increases the risk that my house will get robbed. This means the insurance company is at a greater risk of paying out.
The 2 party example can be used to explain information asymmetry. Information asymmetry simply means that one party has more information. It isn't specific information, but it is information regarding whatever situation is going on.
In the example I provided with me and the insurance company as the 2 parties, I would be the party with more information, simply because I know my intentions and thoughts and the insurance company does not. In this example, I behaved inappropriately
from the perspective of the insurance company, because my neglect put the insurance company at greater risk.
I hope that helps.