Navigating the Ethical Tightrope: Exploring Moral Hazard in the World of Remote Work

 When you were young, your parents might ask you to finish your homework quickly or tell you not to eat certain snacks. Just imagine, what will you do when your parents go out and "no one controls" you? Most people should have the experience of slacking off from studying or doing things that are not allowed. Based on this situation, there is a constraining and constrained relationship between parents and children.

The relationship between employees and employers can actually be analogized to this relationship. Under the traditional work model, the presence of the employer in the workplace can be regarded as a constraint. Now, think of the previous example. When you have the opportunity to work anywhere you want, that is, when these "constraints" disappear, will you have the idea of "no one controls"? Once you have this idea, will you use your working time to do other things or slack off at work? When you work at home and the person you like suddenly asks you to go for a walk, if your boss doesn't know, how will you choose?

After experiencing COVID-19, remote work became more prevalent, it allows employees to choose safer work locations. While remote work offers flexibility, it also means employees are removed from the direct supervision of their employers, bringing up concerns about employees possibly mixing personal tasks with work responsibilities (Fried and Hansson, 2013). Some employees have the courage to reduce their workload or blur the boundaries between work and life because the risks associated with these actions usually do not need to be borne by them. This phenomenon is called a moral hazard in economics. More technically speaking, moral hazard is a situation in which a party chooses to do something even though they know they will not have to bear all the consequences of doing it (Coase, 1960). 

Then, think about two questions: What impact will this moral hazard have on firms? Will it only impact firms?

Firstly, remote working can lead to employee distractions such as cyberloafing. Cyberloafing is when employees use work time to engage in non-work-related activities on the Internet (Derya, Ozler and Polat, 2012). While some say this behavior has a positive impact, it can also lead to a decrease in work efficiency (Lim and Chen, 2012), known in economics as reduced productivity. Employees may even work less and be less productive, which results in less output. Both situations put the companies’ profits at risk. This is just an easily visible effect.

Another key effect of moral hazard is increasing unnecessary costs for companies. You may be curious, how is employee behavior related to costs? Just go ahead. Employees may misrepresent their working hours and output in order to avoid taking risks.

They may exaggerate the time they spend at work or embellish their results (Lima, 2022), which leads to companies compensating for non-existent work, thereby increasing costs. If you think this kind of moral hazard only affects firms, you'd be wrong. It also affects employees and consumers.

We have mentioned before that this moral hazard increases the likelihood of reduced output. Reduced output means reduced supply. What impact will that have on the market and consumers? There is a diagram in economics that explains this well.

As supply decreases, the supply curve shifts to the left. If demand remains unchanged, the market equilibrium point will rise, and then prices will rise, making it more expensive for consumers to purchase products.

Based on the previous example, it also increases the distrust between the employer and the employee. Simultaneously, employers will certainly not let themselves suffer losses in vain.

Therefore, the remote working model will make employers consider the results more and constrain employees with higher requirements to offset the impact of moral hazard on corporate costs and profits. But this increases the stress and workload of employees (Mawritz, Folger and Latham, 2013).

The above impacts are some tricky issues for company development. This requires employers to adapt their management model to different situations.

· Company administration and regulation

Research shows that survey recipients are more willing to carry through the survey if their completion progress is known (Conrad et al., 2010). Therefore, to avoid mistrust, companies can issue company-specific computers to employees to display their work progress in real-time. Peer pressure also plays a role in this (Eriksson, Poulsen and Villeval, 2009). Appropriate penalties can also be given to lazy employees.

· Incentive mechanism

Punishment alone may be counterproductive. There should be incentives as well as penalties to ensure greater employee loyalty (Jensen et al., 2020). High performers deserve extra incentives, such as extra pay on top of their performance-based base salary and year-end bonuses. What's more attractive than "money"?

· Communication and teamwork

Employee psychology is also a hot topic at the moment and employees could maintain a more equal relationship with employers. Communication is a bridge. Maintaining regular team communication and team meetings ensures that employees clearly understand their work goals and tasks. It also allows employees to voice their aspirations, and then the employer takes on board, providing necessary support and feedback to enhance interaction. When employees and employers are working harmoniously towards their respective goals and making gains, output issues and employee wellness problems work out nicely.

The impact of moral hazard in remote work on companies, employees, and consumers is considerable, but luckily, there are still some ways to address the problem and minimize the negative impact in remote work. However, moral hazard is pervasive in the whole society and economy, no matter whether it is insurance markets, financial markets, or even the little things in our family life, the impact of moral hazard is unavoidable. More effort could be made on this. Every coin has two sides. If the negative effects are solved, there may be other unexpected gains!

Reference List

Coase, R.H. (1960). ‘The Problem of Social Cost’, The Journal of Law & Economics, 3, pp.1–44. https://www.jstor.org/stable/724810.

Conrad, F.G., et al. (2010). ‘The impact of progress indicators on task completion’, Interacting with Computers, 22(5), pp.417–427. doi:https://doi.org/10.1016/j.intcom.2010.03.001.

Derya, E., Ozler & Polat, G. (2012). ‘Cyberloafing phenomenon in organizations: Determinants and impacts’, International Journal of eBusiness and eGovernment Studies, 4(2), pp.2146-0744. https://sobiad.org/eJOURNALS/journal_IJEBEG/arhieves/2012_2/derya_ergun.pdf.

Eriksson, T., Poulsen, A. & Villeval, M.C. (2009). ‘Feedback and incentives: Experimental evidence’, Labour Economics, 16(6), pp.679–688. doi:https://doi.org/10.1016/j.labeco.2009.08.006.

Fried, J. and David H. H. (2013). Remote. Currency.

Jensen, N., et al. (2020). ‘Conspicuous monitoring and remote work’, Journal of Economic Behavior & Organization, 176, pp.489–511. doi:https://doi.org/10.1016/j.jebo.2020.05.010.

Lim, V.K.G. and Chen, D.J.Q. (2012). ‘Cyberloafing at the workplace: gain or drain on work?’, Behaviour & Information Technology, 31(4), pp.343–353. doi:https://doi.org/10.1080/01449290903353054.

Lima, M.M. (2022). Shirking from home?: the effects of remote work on overstatement of

working hours. Available at: https://www.teses.usp.br/teses/disponiveis/12/12136/tde-24082022-162123/en.php (Accessed 17 Apr. 2024).

Mawritz, M.B., Folger, R. & Latham, G.P. (2013). ‘Supervisors’ exceedingly difficult goals and abusive supervision: The mediating effects of hindrance stress, anger, and anxiety’, Journal of Organizational Behavior, 35(3), pp.358–372. doi:https://doi.org/10.1002/job.1879.