Illusions of moral hazard: A conceptual and empirical critique

Abstract

This piece presents a three-fold critique of the theory of moral hazard. It begins with an examination of the core concepts of the theory—perverse incentives, negative precedents, norms, and provocation—and argues that these concepts are often used in conflicting and contradictory ways within the emerging literature on moral hazard. A second critique identifies several methodological problems. In particular, the literature relies heavily on a few cases to illustrate the utility of the theory. In doing so it suffers from selection bias and generates spurious findings. The third critique presents a series of empirical objections to the literature, especially as it applies to the cases in the Balkans. This criticism begins by challenging the evidence of a causal connection between international norms, perverse incentives and the ethnic wars in Bosnia in 1992 and in Kosovo in 1998–99. The piece concludes with a discussion of recent studies which show that, while there was a rise in regional and civil violence from 1989 to 1993, since then ethnic conflict has been on the wane and has corresponded with the rise of the norms of international humanitarian intervention. Contrary to the claims of moral hazard theory that norms of intervention create problems, the data suggest that intervention norms may be a significant factor in reducing the frequency and intensity of ethnic and civil violence.