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Double Oral Auctions And Tendencies Toward Moral Hazard

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  • Gazda Vladimir

    ()
    (Technical univeristy of Kosice, Faculty of economics)

  • Malikova¡ Zuzana

    ()
    (Technical univeristy of Kosice, Faculty of economics)

  • Kubak Matus

    ()
    (Univeristy of Presov in Presov, Faculty of management)

  • Grof Marek

    ()
    (Technical univeristy of Kosice, Faculty of economics)

Abstract

Moral hazard can be found almost in all fields of human activities. Moral hazard is a change of economic agent´s behaviour when circumstances change. Theoretical background of moral hazard issue in economics dates back to 1970s. Recognition of moral hazard started by published studies of Pauly (Pauly 1968), Zeckhauser (Zeckhauser 1970), Arrow (Arrow 1971) and Mirrlees (Mirrlees 1999). Current situation of the global economy (fall 2011) was caused largely by moral hazard executed by authorities such as governments, institutions, ranking agencies, banks, chief executive officers, politicians etc. Efforts to stabilise Eurozone, governments bail-outs to banks, governments purchases of toxic assets, rescue packages given to the bank sector and big companies, which are 'too big to fail', rescue packages given to debtor nations, golden parachutes given to employees which are leaving companies are nothing but the manifestations of moral hazard in economic and politic reality. This paper uses an economic experiment with 96 subjects to examine the tendencies of economic agents towards moral hazard. Design of the experiment allowed simulating third party'(tm)s intervention on a market (e.g. state funding accelerating purchase, health care insurance function on the market with health care). Obtained data are statistically evaluated and it is shown, that economic agents incline to moral hazard in case, when it is possible. Study shows how rational agents became less rational in terms of average market price, after intervention of a third party on the market. Third party intervention raises the average market prices presenting a manifestation of moral hazard. It is shown, that under given assumptions, even rational economic agents diverge from rational and market efficient strategies and behave irresponsibly. Despite generally negative attitude towards moral hazard, it is shown that economic agents have tendencies to behave in such a manner. During experiment we observed robust deviation in equilibrium market price before and after the third party intervention.

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Bibliographic Info

Article provided by University of Oradea, Faculty of Economics in its journal The Journal of the Faculty of Economics - Economic.

Volume (Year): 1 (2012)
Issue (Month): 2 (December)
Pages: 207-213

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Handle: RePEc:ora:journl:v:1:y:2012:i:2:p:207-213

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Keywords: Moral hazard; economic experiment; market failures; state funding accelerating purchase; equilibrium market price;

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  1. C. Kirabo Jackson & Henry S. Schneider, 2010. "Do Social Connections Reduce Moral Hazard? Evidence from the New York City Taxi Industry," NBER Working Papers 16279, National Bureau of Economic Research, Inc.
  2. Mirrlees, J A, 1999. "The Theory of Moral Hazard and Unobservable Behaviour: Part I," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 66(1), pages 3-21, January.
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