Moral Hazard

Moral Hazard is a type of social action problem which arises any time we try to protect ourselves from risk. The basic idea is that shielding someone from the full consequences of their actions will incentivize loss-increasing behaviour.

In other words, people tend to take more risks when they are shielded from the full consequences of their actions.

In the above example, it would take a person of strong moral character to write good code with this perverse incentive structure.

Moral Hazard is both a Free-Rider Problem and a coordination problem.