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.

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