Abstract

Moral hazard is reflected in the information asymmetry between the agent and the principal, as well as under the assumption that humans are egotistic with limited rationality, often risk-averse and antagonistic towards each other’s goals. The agent could thus hide the truth from the principal, not abide by their mutual agreement, and tamper with the investment objectives and plans. From the perspective of Taiwan’s external market mechanisms to corporate governance, shareholders (principals) can exploit situations such as poor sales of company products or corporate managers failing to yield satisfactory performance, etc., to monitor and keep the managerial hierarchy (agents) in check through capital market and corporate control market. A practical way to avoid such moral hazard is for the agents to follow the Golden Rule advocated by Hans Küng “Do unto others as you would have others do unto you”, and to live up to the ethical principle of “commitment to a culture of tolerance and a life of truthfulness”. Relatively, the agency costs required by other methods to reduce information asymmetry and moral hazard problems seem comparatively higher than the former.

Key words: Agency problem, corporate governance, business ethics, moral hazard information asymmetry, economic ethics of the capitalist market.