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Intrinsic Moral Hazard

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  • Korkut Alp Erturk

Abstract

The paper argues that financial deregulation incentivized financial firms to take excessive risks and over-expand because it turned social insurance against systemic risk into a common pool (or open) resource. The increased size and complexity of deregulated financial markets in turn raised the social cost of imposing discipline in financial markets to prohibitive levels. Because this undermined the credibility of the regulators threats of sanction, their deterrence strategy was from then on subgame imperfect. This suggests that moral hazard can be explained by the market expectation that regulators would act like a rational maximizer rather than by the things they irrationally did or not do.

Suggested Citation

  • Korkut Alp Erturk, 2019. "Intrinsic Moral Hazard," Working Paper Series, Department of Economics, University of Utah 2019_03, University of Utah, Department of Economics.
    • Handle: RePEc:uta:papers:2019_03
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    File URL: https://economics.utah.edu/research/publications/2019-03.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    systemic risk; moral hazard; financial deregulation; coordination failure; excessive risk taking and financial crisis JEL Classification: D72; C70; G20; G18;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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