Incentives, Disincentives, Expections

• For Thursday, reach Schuck, ch. 7.
• WRITING ASSIGNMENT
• DC PROGRAM
• DREIER ROUNDTABLE OP-ED

POLICYMAKERS

• ELECTEDS:  Reelection, institutional power, good public policy
• BUREAUCRATS: Job security, professional and organizational loyalty,good public policy

CITIZENS

AFFECTED PARTIES

MISMATCH OF INCENTIVES AND DESIRABLE OUTCOMES:

• COLLECTIVE GOODS
• COLLECTIVE ACTION
• TIME HORIZONS

MORAL HAZARD

From Investopedia:

[One] moral hazard that contributed to the financial crisis was the collateralization of questionable assets. In the years leading up the crisis, it was assumed lenders underwrote mortgages to borrowers using languid standards. Under normal circumstances, it was in the best interest of banks to lend money after thoughtful and rigorous analysis. However, given the liquidity provided by the collateralized debt market, lenders were able to relax their standards. Lenders made risky lending decisions under the assumption they would likely be able to avoid holding the debt through its entire maturity. Banks were offered the opportunity to offload a bad loan, bundled with good loans, in a secondary market through collateralized loans, thus passing on the risk of default to the buyer. Essentially, banks underwrote loans with the expectation that another party would likely bear the risk of default, creating a moral hazard and eventually contributing to the mortgage crisis. 

 

COGNITIVE BIASES

TRUST AND CREDIBILITY

• OF INCENTIVES AND DISINCENTIVES
• OF INFORMATION