Advanced Search
MyIDEAS: Login

Private investment and government protection

Contents:

Author Info

  • Carolyn Kousky
  • Erzo Luttmer

    ()

  • Richard Zeckhauser

Abstract

Hurricane Katrina did massive damage because New Orleans and the Gulf Coast were not appropriately protected. Wherever natural disasters threaten, the government—in its traditional role as public goods provider—must decide what level of protection to provide to an area. It does so by purchasing protective capital, such as levees for a low-lying city. (“Protection” also consists of prohibiting projects that raise risk levels, such as draining swamps.) We show that if private capital is more likely to locate in better-protected areas, as would be expected, then the marginal social value of protection will increase with the level of protection provided. That is, the benefit function is convex, contrary to the normal assumption of concavity. When the government protects and the private sector invests, there may be multiple Nash equilibria due to the ill-behaved nature of the benefit function. Policy makers must compare them, rather than merely follow local optimality conditions, to find the equilibrium offering the highest social welfare. There is usually considerable uncertainty about the amount of private investment that will accompany any level of protection, further complicating the government’s choice problem. We show that when deciding on the level of protection to provide now, the government must take account of the option value of increasing the level of protection in the future. We briefly examine but dismiss the value of rules of thumb, such as building for 1000-year floods or other rules that ignore benefits and costs. Copyright Springer Science + Business Media, LLC 2006

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://hdl.handle.net/10.1007/s11166-006-0172-y
Download Restriction: Access to full text is restricted to subscribers.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Article provided by Springer in its journal Journal of Risk and Uncertainty.

Volume (Year): 33 (2006)
Issue (Month): 1 (September)
Pages: 73-100

as in new window
Handle: RePEc:kap:jrisku:v:33:y:2006:i:1:p:73-100

Contact details of provider:
Web page: http://www.springerlink.com/link.asp?id=100299

Related research

Keywords: Risk; Disaster; Floods; Infrastructure; Option value; Levees; Global warming; Multiple equilibria;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Pindyck, Robert S., 2000. "Irreversibilities and the timing of environmental policy," Resource and Energy Economics, Elsevier, vol. 22(3), pages 233-259, July.
  2. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  3. W. Kip Viscusi & Joseph E. Aldy, 2003. "The Value of a Statistical Life: A Critical Review of Market Estimates throughout the World," NBER Working Papers 9487, National Bureau of Economic Research, Inc.
  4. Edward L. Glaeser & Jesse M. Shapiro, 2001. "Cities and Warfare: The Impact of Terrorism on Urban Form," NBER Working Papers 8696, National Bureau of Economic Research, Inc.
  5. Banerjee, Abhijit V, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 797-817, August.
  6. repec:reg:rpubli:282 is not listed on IDEAS
  7. Zeckhauser, Richard J, 1996. "The Economics of Catastrophes," Journal of Risk and Uncertainty, Springer, vol. 12(2-3), pages 113-40, May.
  8. Barro, R.J., 1988. "Government Spending In A Simple Model Of Endogenous Growth," RCER Working Papers 130, University of Rochester - Center for Economic Research (RCER).
  9. Murphy, Kevin M. & Shleifer, Andrei & Vishny, Robert W., 1989. "Industrialization and the Big Push," Scholarly Articles 3606235, Harvard University Department of Economics.
  10. Levitt, Steven D, 1997. "Using Electoral Cycles in Police Hiring to Estimate the Effect of Police on Crime," American Economic Review, American Economic Association, vol. 87(3), pages 270-90, June.
  11. Charles M. Tiebout, 1956. "A Pure Theory of Local Expenditures," Journal of Political Economy, University of Chicago Press, vol. 64, pages 416.
  12. Jonathan Klick & Alexander Tabarrok, . "Using Terror Alert Levels to Estimate the Effect of Police on Crime," American Law & Economics Association Annual Meetings 1042, American Law & Economics Association.
  13. Andrew B. Abel & Avinash K. Dixit & Janice C. Eberly & Robert S. Pindyck, 1996. "Options, the Value of Capital, and Investment," NBER Working Papers 5227, National Bureau of Economic Research, Inc.
  14. Hallstrom, Daniel G. & Smith, V. Kerry, 2005. "Market responses to hurricanes," Journal of Environmental Economics and Management, Elsevier, vol. 50(3), pages 541-561, November.
  15. Kunreuther, Howard & Heal, Geoffrey, 2003. " Interdependent Security," Journal of Risk and Uncertainty, Springer, vol. 26(2-3), pages 231-49, March-May.
  16. Matthew E. Kahn, 2005. "The Death Toll from Natural Disasters: The Role of Income, Geography, and Institutions," The Review of Economics and Statistics, MIT Press, vol. 87(2), pages 271-284, May.
  17. Matthew E. Kahn, 2000. "Smog Reduction's Impact on California County Growth," Journal of Regional Science, Wiley Blackwell, vol. 40(3), pages 565-582.
  18. Joseph Persky, 2001. "Cost-Benefit Analysis and the Classical Creed," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 199-208, Fall.
Full references (including those not matched with items on IDEAS)

Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Can Safe Public Parks Cause More Crime?
    by Matthew E. Kahn in Environmental and Urban Economics on 2011-12-29 00:42:00
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Francois Salanie & Nicolas Treich, 2009. "Option Value and Flexibility: A General Theorem with Applications," LERNA Working Papers 09.12.288, LERNA, University of Toulouse.
  2. Luttmer, Erzo F. P. & Zeckhauser, Richard & Kousky, Carolyn, 2006. "Permits to Elicit Information," Working Paper Series rwp06-049, Harvard University, John F. Kennedy School of Government.
  3. Kousky, Carolyn & Kunreuther, Howard C., 2009. "Improving Flood Insurance and Flood Risk Management: Insights from St. Louis, Missouri," Discussion Papers dp-09-07, Resources For the Future.
  4. Craig E. Landry & Paul Hindsley & Okmyung Bin & Jamie B. Kruse & John C. Whitehead & Kenneth R. Wilson, 2009. "Weathering the Storm: Measuring Household Willingness-to-Pay for Risk-Reduction in Post-Katrina New Orleans," Working Papers 09-18, Department of Economics, Appalachian State University.
  5. Wang, Chunhua, 2014. "Regulating land development in a natural disaster-prone area: The roles of building codes," Resource and Energy Economics, Elsevier, vol. 36(1), pages 209-228.
  6. Kousky, Carolyn & Cooke, Roger M., 2009. "The Unholy Trinity: Fat Tails, Tail Dependence, and Micro-Correlations," Discussion Papers dp-09-36-rev.pdf, Resources For the Future.
  7. Raghav Gaiha1 & Kenneth Hill & Ganesh Thapa, 2012. "Have Natural Disasters Become Deadlier?," ASARC Working Papers 2012-03, The Australian National University, Australia South Asia Research Centre.
  8. Devin Bunten & Matthew E. Kahn, 2014. "The Impact of Emerging Climate Risks on Urban Real Estate Price Dynamics," NBER Working Papers 20018, National Bureau of Economic Research, Inc.
  9. Céline Grislain-Letrémy & Sabine Lemoyne de Forges, 2011. "Coordinating Flood Insurance and Collective Prevention Policies: A Fiscal Federalism Perspective," Working Papers 2011-07, Centre de Recherche en Economie et Statistique.
  10. Davlasheridze, Meri & Fisher-Vanden, Karen & Klaiber, H. Allen, 2012. "The Effects of Adaptation Measures on Hurricane Induced Property Losses," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124565, Agricultural and Applied Economics Association.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:kap:jrisku:v:33:y:2006:i:1:p:73-100. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Guenther Eichhorn) or (Christopher F. Baum).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.