Private Investment and Government Protection
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. We show that if private capital is more likely to locate in better-protected areas, 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, due to the ill-behaved nature of the benefit function, there may be multiple Nash equilibria. 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 investment that will accompany any level of protection, further complicating the government%u2019s choice problem. We show that when deciding on the current level of protection, the government must take account of the option value of increasing the level of protection in the future.Download Info
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12255.Length:
Date of creation: May 2006
Date of revision:
Handle: RePEc:nbr:nberwo:12255
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Keywords:Other versions of this item:
- Carolyn Kousky & Erzo Luttmer & Richard Zeckhauser, 2006. "Private investment and government protection," Journal of Risk and Uncertainty, Springer, vol. 33(1), pages 73-100, September.
- Kousky, Carolyn & Luttmer, Erzo F. P. & Zeckhauser, Richard, 2006. "Private Investment and Government Protection," Working Paper Series rwp06-017, Harvard University, John F. Kennedy School of Government.
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D92 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Firm Choice and Growth, Financing, Investment, and Capacity
- H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
- Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters
- R10 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-06-10 (All new papers)
- NEP-PBE-2006-06-10 (Public Economics)
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As found by EconAcademics.org, the blog aggregator for Economics research:- Can Safe Public Parks Cause More Crime?
by Matthew E. Kahn in Environmental and Urban Economics on 2011-12-29 00:42:00
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