(Solved):Explain how being “too big to fail” creates a moral hazard problem. View Answer…

 

Question

Explain how being “too big to fail” creates a moral hazard problem.

 

EXPERT ANSWER

Corporations that are considered to be “too big to fail” know that even if they fail the government will be forced to bail them out. This sometimes encourages such corporations to take reckless decisions in search of higher profits. They wouldn’t take such decisions under normal circumstances. This creates a problem of moral hazard as. since they have

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