Moral Hazard

Moral Hazard is defined by the Economist as "that people with insurance may take greater risks than they would do without it because they know that they are protected, so the insurer may get more claims than it bargained for."

AIG acted in this way when they went on luxury resorts totaling around $440,000 in California just weeks after they received their bailout. That sounds like a great idea to use American tax money in order to fund a luxury "vacation." This company came to the taxpayers for help, and what the American people got in return was a mockery on news networks of how the company who just got bailed out spent their money. AIG knows that they have the government like a rope around their neck. They know that the government will take whatever it takes to keep them afloat, and this is why they continue to act irresponsibly. Companies in a desperate situation such as AIG and GM should not be spending ridiculous amounts of money rewarding their top executives with luxury resorts and private jet flights. What a company should do is cost cut and develop strategies in order to turn the company around, but it seems as if all top management cares about is deciding which five star resort they should travel to next month.

(Source: www.dubai-information.info/)