Immoral safety?

Many examples of moral hazard refer to people (e.g. bankers) taking excessive risks. They get the upside benefit, such as a high return on a risky loan that turns out OK. If the loan goes bad, they get bailed out, to avoid the domino effect of a series of bank runs, so they don't take the downside cost. Their incentives are askew and inefficient decisions are taken.

But there are some situations where the economy is organised so that too little risk is taken. Suppose you have responsibility in an organisation for health and safety, or avoiding accusations of discrimination. If you are judged just on these criteria, and if you can impose regulations on those in the organisation who produce the final product, then why not impose the tightest regulations possible. This will maximise those indicators on which you are judged (e.g. no accidents, or no lawsuits).

But if you try to get rid of all downside risk, there can be no upside benefit. No risks are taken and the organisation stagnates. You see this in some schools, where teachers avoid activities that may involve some risk to children. But then the children will not get the benefits of those activities.

This is a form of moral hazard, perhaps better called immoral safety.