Asymmetric information creates a moral hazard problem if one party in a transaction cannot observe the (possibly bad) behaviour of the other party. It was moral hazard that caused the sub-prime mortgage meltdown in the U.S. housing market, as those who owned the risky mortgages could not observe the decisions made by mortgage brokers—who were more than willing to dole out money (that wasn’t their own) to high-risk homeowners.
Tag: infidelity (Page 2 of 2)
We have this perception that most cheating that goes on in marriage is among the extremely wealthy. Well, of course we do. When a man in the bottom of the income distribution discovers that the child he is raising is not his own, it doesn’t exactly make the evening news. Rationally we all know this, but the perception that cheating is positively correlated with income is fairly pervasive. So, are we correct in thinking that infidelity is a luxury good consumed by the very wealthy?