Moral Hazard and the Catholic Church

There is an article on yahoo about the San Diego diocese filing bankruptcy because it cannot afford to pay the damages to its sexual assault accusers. Bankruptcy creates a well-known moral hazard problem because it reduces the cost of making a risky decision. In essence, if you are weighing the benefits and costs of a risky decision, the ability to file for bankruptcy means you do not have to pay back all of your creditors and others you owe money to. This reduction in cost means some people may end up making choices they otherwise wouldn't make and we have more bankruptcies as a result. It also is a problem for creditors, because they know that if someone is on the verge of bankruptcy, they are less likely to be repaid and are less likely to lend to those who are in the most need.

What is interesting about the article above regarding the SD diocese is that according to the plaintiffs' lawyers, the Catholic Church is able to hide more embarrassing information about their behavior, which means there is a second source of moral hazard in bankruptcy. Remember, they are in trouble because they were helping to cover-up for priests who sexually abused parishioners. Apparently, the ability to declare bankruptcy reduced their cost of getting caught doing this. While bankruptcy may not have made the difference in their decision, it certainly reduced the cost of the cover-up, giving them more of an incentive to engage in this behavior.