When an incentive system rewards someone’s risky (abusive or neglectful) behavior but the cost of the is paid by someone else it creates a Moral Hazard. This can happen when someone is too trusting of someone acting on their behalf and is betrayed (the Principal-Agent Problem). An easy example is politicians and government officials with stock in a health care company promoting that companies’ experimental products. Another example is when an organization has the sole ability to police and investigate itself for misconduct.
