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The Welfare Economics of Catastrophe Losses and Insurance

Author

Listed:
  • Dwight Jaffee

    (Haas School of Business, University of California, Berkeley, 2220 Piedmont Avenue, Berkeley, CA 94708, U.S.A.)

  • Thomas Russell

    (Emeritus Professor, Santa Clara University, 500 El Camino Real, Santa Clara, CA 95053 U.S.A.)

Abstract

This paper uses the tools of welfare economics to analyse the appropriate mix of private sector and government responses to catastrophic events. In particular, we examine the appropriate roles of post-disaster government aid, private insurance and mitigation activities. The analysis focuses on the distinction between the ex ante and ex post welfare criteria, as well as incentive issues such as may arise from the Samaritan's dilemma. A key factor is that individuals maintain differing subjective beliefs concerning the probability or magnitude of the catastrophic event. The analysis applies to insurance markets certain concepts that are now also being developed in the finance literature to examine the efficiency of naked credit default swaps and other instruments that are in essence side bets among agents with heterogeneous beliefs. We conclude that ex post welfare economics provides fundamental insights that have not been previously integrated into the discussions concerning the losses created by catastrophic events, including a potential role for mandatory insurance.

Suggested Citation

  • Dwight Jaffee & Thomas Russell, 2013. "The Welfare Economics of Catastrophe Losses and Insurance," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 38(3), pages 469-494, July.
    • Handle: RePEc:pal:gpprii:v:38:y:2013:i:3:p:469-494
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    Citations

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    Cited by:

    1. Menna Hassan & Nourhan Sakr & Arthur Charpentier, 2022. "Government Intervention in Catastrophe Insurance Markets: A Reinforcement Learning Approach," Papers 2207.01010, arXiv.org.
    2. Arthur Charpentier & Laurence Barry & Molly R. James, 2022. "Insurance against natural catastrophes: balancing actuarial fairness and social solidarity," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 47(1), pages 50-78, January.
    3. Justin Gallagher & Daniel Hartley, 2017. "Household Finance after a Natural Disaster: The Case of Hurricane Katrina," American Economic Journal: Economic Policy, American Economic Association, vol. 9(3), pages 199-228, August.
    4. Kousky, Carolyn, 2012. "Informing Climate Adaptation: A Review of the Economic Costs of Natural Disasters, Their Determinants, and Risk Reduction Options," RFF Working Paper Series dp-12-28, Resources for the Future.
    5. Selene Perazzini, 2020. "Public-Private Partnership in the Management of Natural Disasters: A Review," Papers 2006.05845, arXiv.org.

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