“The Moon illusion is an optical illusion which causes the Moon to appear larger near the horizon than it does higher up in the sky. It has been known since ancient times and recorded by various cultures. The explanation of this illusion is still debated.” source: Wikipedia
What is known is that it's a purely psychological illusion rather than an optical one. The same phenomenon causes distant hills to look far more steeply inclined than they actually are.
Further reading: Helen Ross; Cornelis Plug (2002). he Mystery of The Moon Illusion. USA: Oxford University Press.