On Monday 23 September the package holiday provider Thomas Cook PLC entered compulsory liquidation proceedings after government, shareholders and lenders failed to agree a rescue package.
Whatever initial hope there was that government would stump up a £150m bailout were dashed as Boris Johnson claimed that such a deal would create a ‘moral hazard’, noting that he was unsure ‘whether the directors of these companies are properly incentivised to sort such matters out.’
The question of director incentives and moral hazard is an intriguing one. Moral hazard has always been an ambiguous concept, interpreted on the one hand as a breach of responsible conduct by individuals and on the other in more abstract economic terms as an understandable and rational response to a subsidised price (often provided by government guarantees), implying morality plays no part in these utility maximising decisions.
