The correct term for when the existence of a contract changes the behavior of a party to the contract is "moral hazard".
Moral hazard refers to the situation where one party engages in riskier behavior knowing that they are insulated from the costs associated with that risk. For example, a person with automobile insurance may drive more recklessly knowing that insurance will cover any damages.
The other options do not correctly describe how a contract influences behavior:
- Irrational expectations refers to unrealistic assumptions about future events.
- Adverse selection describes a market outcome where buyers and sellers have asymmetric information.
- Opportunity cost is the loss of potential gain from other alternatives when one alternative is chosen.
So in summary, "moral hazard" is the economic term that matches the scenario described where a contract changes the behavior of a party to the contract. It specifically refers to engaging in more risk because the costs are insured against.