Moral hazard

Research output: Chapter in Book/Report/Conference proceedingChapterpeer-review

1 Citation (Scopus)


In this chapter, we discuss the moral hazard. We make a point that it is a concept that cannot be separated from the adverse selection, which is a problem that stems from information asymmetry. Further, we looked at the two ways in which management literature has suggested to manage asymmetric information, adverse selection and moral hazard. These are the accounting framework and the agency theory. In looking at the agency theory as a mitigating factor to the question of asymmetric information, adverse selection and moral hazard, we make a point that the accounting framework and the theory do not resolve the question of asymmetric information, adverse selection and, subsequently, the question of the moral hazard. In our view, the reason this solution would have difficulties in mitigating asymmetric information, adverse selection, and subsequently, the question of the moral hazard lies in the fact that the decision whether to disclose material facts or not is dependent on one economic agent. If this agent is of the view that they could gain some advantage over their counterparties, in our view, it will be unlikely that there will be a disclosure of such information. In examining the conceptual framework of accounting, we note that the IAS is asking that the economic agent should work against maximizing what he/she could potentially gain. Our view in this regard is that the IAS appears to be appealing to the conscience or ethics that economic agents should do what is morally correct. This is clear from the use of the word “fair”. We are of the view that AI will outperform the mitigation actions put forward by the finance and accounting literature, the agency theory and the conceptual framework. With AI, there is no need to rely on economic agents to be “fair” by disclosing material information. There is also no need to persuade economic agents by incentives of disclosing material information or coercing them with threats of penalties.

Original languageEnglish
Title of host publicationAdvanced Information and Knowledge Processing
Number of pages8
Publication statusPublished - 2020

Publication series

NameAdvanced Information and Knowledge Processing
ISSN (Print)1610-3947
ISSN (Electronic)2197-8441

ASJC Scopus subject areas

  • Management Information Systems
  • Information Systems
  • Information Systems and Management
  • Artificial Intelligence


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