(Institution’s name)
Finance
Response 1
I agree with your assessment that a way to avoid moral hazard is to punish the corporations and let them fail. As a principle of free market and capitalism, we should let the inefficient organizations die and more efficient one survive. However, this analysis looks good only in theory. In reality, letting these big corporations fail have huge social consequences. For instance, when Lehman Brothers went bankrupt in the 2008 financial crisis, many people lost their savings and jobs. Furthermore, many people lost faith in the system. Similarly, when the car companies were not saved completely, the whole Detroit city came to a halt. These are serious consequences that affect millions of people. Therefore, in some situations it may make sense to save these huge corporations.
The other way to then avoid moral hazard is to have proper regulations and policies in place. For instance, the government can encourage competition in the industry by giving tax allowances and subsidies to ensure that not one company is able to monopolize the industry.
Response 2
I am a little perplexed by your post. In the beginning you quote that if a person isn’t responsible for his decisions, then it is possible that the moral hazard exists. However, the solution that you give is exactly the same. You propose that to avoid moral hazard we should have many people making decisions. Isn’t this going to lead to moral hazard, as if many people are taking a decision, not one person can be held accountable for his actions.
A better way to avoid moral hazards would be like you suggested, to have rules and regulations. However, having just rules and regulations are not enough. The company needs to ensure that they are being followed. In Baring’s Bank case, there were rules in place, but he broke them for the sake of his company. He was given a certain limit to trade in, but he forged his trading slips to earn more profits. (Bhugaloo)
Reference:
Bhugaloo, S. (n.d.). Commodities Trading: Nick Leeson, Internal Controls and the Collapse of Barings Bank. Retrieved November 21, 2014, fromhttp://www.tradefutures.co.uk/Nick_Leeson_Barings_Bank.pdf
