<P> Rowell and Connelly offer a detailed description of the genesis of the term moral hazard, by identifying salient changes in economic thought, which are identified within the medieval theological and probability literature . Their paper compares and contrasts the predominantly normative conception of moral hazard found within the insurance - industry literature with the largely positive interpretations found within the economic literature . Often what is described as "moral hazard (s)" in the insurance literature is upon closer reading, a description of the closely related concept, adverse selection . </P> <P> Economist Paul Krugman described moral hazard as "any situation in which one person makes the decision about how much risk to take, while someone else bears the cost if things go badly ." Financial bailouts of lending institutions by governments, central banks or other institutions can encourage risky lending in the future if those that take the risks come to believe that they will not have to carry the full burden of potential losses . Lending institutions need to take risks by making loans, and usually the most risky loans have the potential for making the highest return . </P> <P> Taxpayers, depositors, and other creditors often have to shoulder at least part of the burden of risky financial decisions made by lending institutions . </P> <P> Many have argued that certain types of mortgage securitization contribute to moral hazard . Mortgage securitization enables mortgage originators to pass on the risk that the mortgages they originate might default and not hold the mortgages on their balance sheets and assume the risk . In one kind of mortgage securitization, known as "agency securitizations", default risk is retained by the securitizing agency that buys the mortgages from originators . These agencies thus have an incentive to monitor originators and check loan quality . "Agency Securitizations" refer to securitizations by either Ginnie Mae, a government agency, or by Fannie Mae and Freddie Mac, for - profit government - sponsored enterprises ("GSEs"). They are similar to the "covered bonds" that are commonly used in Western Europe in that the securitizing agency retains default risk . Under both models, investors take on only interest - rate risk, not default risk . </P>

Who is someone who risks money to make a large profit