Moral hazard is a problem a firm faces as it grows and adds personnel; the assumption is that new hires will not have the same ownership incentives or be as motivated to work as hard as the original founders, so the new hires may not be as motivated as the founders to put in long hours or may even try to avoid hard work.
To make sure the new hires are doing what they are employed to do, the firm will typically hire monitors (i.e., managers) to supervise the employees. This practice creates a hierarchy that is costly and isolates the top management team from its rank-and-file employees.
Moral hazard is the risk that one party to a transaction will engage in behavior that is undesirable from the other party’s point of view.