Quantifying Moral Hazard: A Reply to Gary Richardson
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In his comment on our 2002 Journal of Economic History paper, Gary Richardson (2007) proposes that our work specifies moral hazard too narrowly. Richardson posits that fixed-rate deposit insurance leads to moral hazard which takes many forms. These include not only the usual notion of risk-taking in the asset portfolio, but also mismanagement, malfeasance, and reduced incentives for depositor monitoring. We agree with his hypothesis and offer some evidence in support of additional avenues for moral hazard to have played a role in the activities of Texas banks in the 1920s.
This article is a response to Deposit Insurance and Moral Hazard: Capital, Risk, Malfeasance, and Mismanagement by Gary Richardson (EJW, September 2007).