Sex Scandals Create a Problem of Moral Hazard

Asymmetric information creates a moral hazard problem if one party in a transaction cannot observe the (possibly bad) behaviour of the other party. It was moral hazard that caused the sub-prime mortgage meltdown in the U.S. housing market, as those who owned the risky mortgages could not observe the decisions made by mortgage brokers—who were more than willing to dole out money (that wasn’t their own) to high-risk homeowners.


Moral hazard is also a problem in the world of celebrity sports figures. Would-be corporate sponsors can’t monitor the bedroom behaviour of the athletes they endorse. As a result, they risk having their brand tarnished if the celeb associated with it is caught in a sex scandal. (Sometimes, admittedly, a sex scandal helps the brand, but I suspect that effect is product-specific.)

The problem with moral hazard it is that it causes risk-averse firms to under-invest in sponsorship. If there was a way to solve the moral hazard problem—for example if firms could directly observe the behaviour of the star whose wagons they are hitched to—then sponsorship would increase and both players in the transactions (firms and celebrities) would be better off.  

I don’t know of a way to solve this particular moral hazard problem. The usual solution, government regulation, seems an unlikely candidate. There is a way, though, for the endorsing firm to reduce the risk created by the moral hazard problem; buy insurance that pays out if the person you endorse behaves badly. It’s called "disgrace insurance."

No surprise that there is sufficient demand to make providing disgrace insurance profitable. But I would love to know how it is priced by the insurance companies. I always thought that being an actuary would be a great job, and now I am absolutely sold on the idea. I can just see it: "Adshade, we want you to get out there and determine the probability that [name big sports celebrity here] will put his willy where he shouldn't!"

What fun. I wonder if they ask their wives.Big thanks to Kim Brooks who sent me this article, which led to this post.

LinkedIn meets Tinder in this mindful networking app

Swipe right to make the connections that could change your career.

Getty Images
Sponsored
Swipe right. Match. Meet over coffee or set up a call.

No, we aren't talking about Tinder. Introducing Shapr, a free app that helps people with synergistic professional goals and skill sets easily meet and collaborate.

Keep reading Show less

Space toilets: How astronauts boldly go where few have gone before

A NASA astronomer explains how astronauts dispose of their, uh, dark matter.

Videos
  • When nature calls in micro-gravity, astronauts must answer. Space agencies have developed suction-based toilets – with a camera built in to ensure all the waste is contained before "flushing".
  • Yes, there have been floaters in space. The early days of space exploration were a learning curve!
  • Amazingly, you don't need gravity to digest food. Peristalsis, the process by which your throat and intestines squeeze themselves, actually moves food and water through your digestive system without gravity at all.
Keep reading Show less

Carl Sagan on why he liked smoking marijuana

Carl Sagan liked to smoke weed. His essay on why is fascinating.

Photo: Photo by Robert Nelson on Unsplash / Big Think
Mind & Brain
  • Carl Sagan was a life long marijuana user and closeted advocate of legalization.
  • He once wrote an anonymous essay on the effects it had on his life and why he felt it should be legalized.
  • His insights will be vital as many societies begin to legalize marijuana.
Keep reading Show less

Can the keto diet help treat depression? Here’s what the science says so far

A growing body of research shows promising signs that the keto diet might be able to improve mental health.

Photo: Public Domain
Mind & Brain
  • The keto diet is known to be an effective tool for weight loss, however its effects on mental health remain largely unclear.
  • Recent studies suggests that the keto diet might be an effective tool for treating depression, and clearing up so-called "brain fog," though scientists caution more research is necessary before it can be recommended as a treatment.
  • Any experiments with the keto diet are best done in conjunction with a doctor, considering some people face problems when transitioning to the low-carb diet.
Keep reading Show less