(Solved):How can being “too big to fail” create a moral hazard problem? View Answer…

 

Question

How can being “too big to fail” create a moral hazard problem?

 

EXPERT ANSWER

When private firms become too big to fail, they expect to be bailed out by the government if they fail. Thus, there is an incentive to take on more risk since the firm will not face the full consequences if the risk materializes.

This type of moral hazard usually starts small with the government trying to postpone some negative

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