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A general rationale for a governmental role in the relief of large risks

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  • Steven Shavell

Abstract

The government often provides relief against large risks, such as disasters. A simple, general rationale for this role of government is considered here that applies even when private contracting to share risks is not subject to market imperfections. Specifically, the optimal private sharing of large risks will not result in complete coverage against them. Hence, when such risks eventuate, the marginal utility to individuals of government relief may exceed the marginal value of public goods. Consequently, social welfare may be raised if the government reduces public goods expenditures and directs these freed resources toward individuals who have suffered losses. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • Steven Shavell, 2014. "A general rationale for a governmental role in the relief of large risks," Journal of Risk and Uncertainty, Springer, vol. 49(3), pages 213-234, December.
    • Handle: RePEc:kap:jrisku:v:49:y:2014:i:3:p:213-234
    DOI: 10.1007/s11166-014-9203-2
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    References listed on IDEAS

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    1. Kenneth A. Froot, 1999. "Introduction to "The Financing of Catastrophe Risk"," NBER Chapters, in: The Financing of Catastrophe Risk, pages 1-22, National Bureau of Economic Research, Inc.
    2. Philip J. Cook & Daniel A. Graham, 1977. "The Demand for Insurance and Protection: The Case of Irreplaceable Commodities," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 91(1), pages 143-156.
    3. Kenneth A. Froot, 1999. "The Financing of Catastrophe Risk," NBER Books, National Bureau of Economic Research, Inc, number froo99-1.
    4. Froot, Kenneth A. (ed.), 1999. "The Financing of Catastrophe Risk," National Bureau of Economic Research Books, University of Chicago Press, number 9780226266237.
    5. Kenneth J. Arrow & Robert C. Lind, 1974. "Uncertainty and the Evaluation of Public Investment Decisions," Palgrave Macmillan Books, in: Chennat Gopalakrishnan (ed.), Classic Papers in Natural Resource Economics, chapter 3, pages 54-75, Palgrave Macmillan.
    6. Froot, Kenneth A., 2001. "The market for catastrophe risk: a clinical examination," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 529-571, May.
    7. Dwight M. Jaffee & Thomas Russell, 1996. "Catastrophe Insurance, Capital Markets and Uninsurable Risks," Center for Financial Institutions Working Papers 96-12, Wharton School Center for Financial Institutions, University of Pennsylvania.
    8. David Moss, 1999. "Courting Disaster? The Transformation of Federal Disaster Policy since 1803," NBER Chapters, in: The Financing of Catastrophe Risk, pages 307-362, National Bureau of Economic Research, Inc.
    9. Priest, George L, 1996. "The Government, the Market, and the Problem of Catastrophic Loss," Journal of Risk and Uncertainty, Springer, vol. 12(2-3), pages 219-237, May.
    10. Kaplow, Louis, 1991. "Incentives and Government Relief for Risk," Journal of Risk and Uncertainty, Springer, vol. 4(2), pages 167-175, April.
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    Cited by:

    1. Andrew Royal, 2017. "Dynamics in risk taking with a low-probability hazard," Journal of Risk and Uncertainty, Springer, vol. 55(1), pages 41-69, August.
    2. Clarke,Daniel Jonathan & Wren-Lewis,Liam, 2016. "Solving commitment problems in disaster risk finance," Policy Research Working Paper Series 7720, The World Bank.
    3. Luigi Alberto Franzoni, 2019. "Legal Change in the Face of Risk-Averse Subjects: A Generalization of the Theory," American Law and Economics Review, American Law and Economics Association, vol. 21(2), pages 394-430.
    4. Bulut, Harun, 2017. "Managing Catastrophic Risk in Agriculture through Ex Ante Subsidized Insurance or Ex Post Disaster Aid," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 42(3), September.

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    More about this item

    Keywords

    Government relief; Large risks; Insurance; D6; D8; K2;
    All these keywords.

    JEL classification:

    • D6 - Microeconomics - - Welfare Economics
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • K2 - Law and Economics - - Regulation and Business Law

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