From Scott Sumner here
Here is an excerpt:
If I ask my students whether they find RE to be plausible, they almost all answer "no."But suppose I ask them a different set of questions:
1. Do you expect to get back all the Social Security that you have been promised?
Almost all say they expect less than what has been promised.
2. Then I ask whether that perception affects their willingness to save money for retirement, outside of Social Security.
Almost all say they are more likely to save for their retirement because of the perception that Social Security is on the road to bankruptcy.
It is often surprising how we fool ourselves about our behavior and the behavior of others. We often think that people ignore incentives when they incentives have ways of working out.
Moral hazard can work out very subtilly. Often it does not require everyone to respond just on the margins. One example that I like is that you let banks fail the most conservative people would end up with more money and power relative to the risk takers and they would end up with more control of the economy.
Another example is crime deterrence, people look at crime doubt the power of deterrence but no one walks up to heavily armed guy without a weapon tries to extort money from him.