Moral Hazard

Agency theory-based strategic management research has paid extensive attention to the moral hazard problem in the principal-agent relationship between owners and management of firms. However, the term moral hazard has an earlier root and a more general meaning, referring to the problem or risk that one party of an interaction may be taken advantage of by another party due to interest conflict and information asymmetry between the involved parties. Strategic management research has focused on incentive (primarily via executive compensation contract) and monitoring as partial solutions to the moral hazard problem.