... be made to a bad credit risk, lenders may decide not to make any loans even though there are good credit risks in the marketplace. Moreover, adverse selection is one of two main sorts of market failure often associated with insurance. Moral hazard can be present in almost any situation involving two parties coming into agreement with one another. In a contract, each party may have the opportunity to gain from acting contrary to the principles implied by the agreement. In financial market, moral hazard arises after the transaction occurs: the lender runs the risk that the borrower will engage in activities that are undesirable from the lender's point of view because they make it less likely that the loan will be paid back. For example, once borrowers have obtained a loan, they may take on big risk (which have possible high returns but also run a greater risk of ...

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