What is the concept of moral hazard in economics?

Moral hazard refers to a situation in which one party is able to take risks because they do not have to bear the full consequences of their actions. In the context of finance, moral hazard often arises when individuals or institutions take excessive risks because they believe they will be bailed out if things go wrong. For example, if a bank believes it will be rescued by the government in the event of financial trouble, it may take on riskier loans or investments than it otherwise would. Moral hazard can lead to inefficient behavior and systemic risks, as individuals or organizations may act in ways that harm the broader economy without facing the full costs of their actions.