Towards a Cross-Sector Moral Hazard Index: Theory, Evidence and Practical Application

The moral hazard phenomenon, whereby agents do not internalise all the implications of their actions, has far-reaching macro-economic stability, contract, efficiency and regulatory implications in financial systems. This study suggests a cross sector Moral Hazard Index (MHI) which is based on the classical agency theory, which is adjusted to modern empirical data. The index is structured in four pillars, Agency -Theoretic Core (AIC), Governance Architecture (GA), Safety-Net and Insurance Design (SID) and Market -Based Indicators (MBI), thus providing effective principles in its framework construction in banking, corporate, agricultural and financial market sectors. The suggested framework will allow standardisation and stay sensitive to the sector-specific features thereby aiding policymakers, regulators and market participants. Lastly, the paper outlines example MHI estimates and evaluates its cross-sector applicability, hence highlighting its real-world applicability to decision-makers and investors.

Moral Hazard, Agency Theory, Corporate Governance, Deposit Insurance, Index Insurance, Market Indicators, Index Construction, Cross-Sector Measurement

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