Gordon’s role in providing inside information to Pearson Specter Litt for the benefit of Pearson Specter Litt's stockholders and himself is an example of a moral hazard.
What is a moral hazard?
- A moral hazard in economics is a circumstance in which an economic actor has an incentive to increase its risk exposure because it does not face the full costs of that risk.
- For example, if a company is insured, it may take on more risk knowing that its insurance will cover the expenditures.
- A moral hazard occurs when the risk-taking party's conduct changes to the detriment of the cost-bearing party after a financial transaction has occurred.
- As an example, suppose you have not insured your home against future damage.
- It suggests that you will bear the entire cost of a loss in the event of a calamity such as a fire or a burglary.
- As a result, you will be more cautious and alert.
Therefore, Gordon’s role in providing inside information to Pearson Specter Litt for the benefit of Pearson Specter Litt's stockholders and himself is an example of a moral hazard.
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