Final answer:
Moral hazard is the conduct of taking greater risks when protected by insurance, not due to dishonesty. It results from a safety net provided by insurance and is exacerbated by imperfect information.
Step-by-step explanation:
The statement 'Moral hazard is described as the increased chance of a loss due to an insured's dishonest tendencies' is false. Moral hazard actually refers to the situation where individuals or businesses may engage in riskier behavior when they have insurance compared to if they were uninsured.
For example, someone with health insurance might not take as many health precautions, knowing that their policy will cover the medical expenses. Similarly, a business with theft and fire insurance could potentially invest less in security measures than an uninsured one.
The concept of moral hazard is primarily related to the change in behavior due to the safety net that insurance provides, rather than to dishonest tendencies. This can lead to higher risks and potential losses. Imperfect information exacerbates the moral hazard problem because insurance companies cannot constantly monitor and adjust the risk profiles of their clients, leading to difficulties in preventing risky behavior.