How can we stop people from exploiting their hidden information advantage?

Moral hazard occurs when one party exploits an information gap to their benefit. This video explores practical strategies to align incentives, reduce asymmetry, and discourage opportunistic behavior in professional and consumer relationships.

Moral hazard arises when an agent uses their superior knowledge to exploit a situation. To mitigate this, we can reduce information asymmetry or restructure incentives. Online platforms like Yelp, Angie’s List, and Amazon demonstrate this by providing transparency through reviews, which forces sellers to prioritize their reputation over short-term exploitation.

Other solutions involve structural changes, such as separating the diagnosis of a problem from the execution of the work, as seen with home inspectors who do not perform the repairs they identify. Payment structures also shift behavior; for example, tying a lawyer's compensation to winning a case rather than billing hours discourages unnecessary work. Additionally, professional ethics, such as the Hippocratic Oath for doctors, serve as a non-monetary incentive to act in the client's best interest.

Source: Solutions to Moral Hazard