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Rules Rather Than Discretion: Lessons from Hurricane Katrina

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  • Howard Kunreuther
  • Mark Pauly
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    Abstract

    This paper explores options for programs to be put in place prior to a disaster to avoid large and often poorly-managed expenditures following a catastrophe and to provide appropriate protection against the risk of those large losses which do occur. The lack of interest in insurance protection and mitigation by property owners and by public sector agencies prior to a disaster often creates major problems following a catastrophic event for victims and the government. Property owners who suffer severe damage may not have the financial resources easily at hand to rebuild their property and hence will demand relief. The government is then likely to respond with costly but poorly targeted disaster assistance. To avoid these large and often uneven ex post expenditures, we consider the option of mandatory comprehensive private disaster insurance with risk based rates. It may be more efficient to have an ex ante public program to ensure coverage of catastrophic losses and to subsidize low income residents who cannot afford coverage rather than the current largely ex post public disaster relief program.

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    File URL: http://www.nber.org/papers/w12503.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12503.

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    Date of creation: Aug 2006
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    Handle: RePEc:nbr:nberwo:12503

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    References

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    1. Kent Smetters, 2005. "Insuring Against Terrorism: The Policy Challenge," NBER Working Papers 11038, National Bureau of Economic Research, Inc.
    2. Daniel McFadden, 2006. "Free Markets and Fettered Consumers," American Economic Review, American Economic Association, vol. 96(1), pages 5-29, March.
    3. Kunreuther, Howard & Novemsky, Nathan & Kahneman, Daniel, 2001. " Making Low Probabilities Useful," Journal of Risk and Uncertainty, Springer, vol. 23(2), pages 103-20, September.
    4. Howard Kunreuther & Mark Pauly, 2004. "Neglecting Disaster: Why Don't People Insure Against Large Losses?," Journal of Risk and Uncertainty, Springer, vol. 28(1), pages 5-21, January.
    5. Hogarth, Robin M & Kunreuther, Howard, 1995. "Decision Making under Ignorance: Arguing with Yourself," Journal of Risk and Uncertainty, Springer, vol. 10(1), pages 15-36, January.
    6. Kunreuther, Howard & Sanderson, Warren & Vetschera, Rudolf, 1985. "A behavioral model of the adoption of protective activities," Journal of Economic Behavior & Organization, Elsevier, vol. 6(1), pages 1-15, March.
    7. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
    8. Colin F. Camerer & Howard Kunreuther, 1989. "Decision processes for low probability events: Policy implications," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 8(4), pages 565-592.
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    Cited by:
    1. Kousky, Carolyn, 2012. "Informing Climate Adaptation: A Review of the Economic Costs of Natural Disasters, Their Determinants, and Risk Reduction Options," Discussion Papers dp-12-28, Resources For the Future.
    2. Brunette, Marielle & Couture, Stéphane, 2008. "Public compensation for windstorm damage reduces incentives for risk management investments," Forest Policy and Economics, Elsevier, vol. 10(7-8), pages 491-499, October.
    3. Botzen, W.J.W. & Aerts, J.C.J.H. & van den Bergh, J.C.J.M., 2009. "Willingness of homeowners to mitigate climate risk through insurance," Ecological Economics, Elsevier, vol. 68(8-9), pages 2265-2277, June.
    4. Paul A. Raschky & Manijeh Schwindt, . "Aid, Catastrophes and the Samaritan's Dilemma," Working Papers 2008-06, Faculty of Economics and Statistics, University of Innsbruck.
    5. Paul A. Raschky & Hannelore Weck-Hannemann, . "Who is going to save us now? Bureaucrats, Politicians and Risky Tasks," Working Papers 2007-29, Faculty of Economics and Statistics, University of Innsbruck.
    6. 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.
    7. Filatova, Tatiana & Parker, Dawn Cassandra & van der Veen, Anne, 2011. "The Implications of Skewed Risk Perception for a Dutch Coastal Land Market: Insights from an Agent-Based Computational Economics Model," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 40(3), December.
    8. Marielle Brunette & Stephane Couture, 2007. "Effects of Public Compensation for Disaster Damages on Private Insurance and Forest Management Decisions," Working Papers - Cahiers du LEF 2007-06, Laboratoire d'Economie Forestiere, AgroParisTech-INRA.
    9. Elisabeth Gsottbauer & Jeroen Bergh, 2011. "Environmental Policy Theory Given Bounded Rationality and Other-regarding Preferences," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 49(2), pages 263-304, June.
    10. Paul Raschky, 2007. "Estimating the effects of risk transfer mechanisms against floods in Europe and U.S.A.: A dynamic panel approach," Working Papers 2007-05, Faculty of Economics and Statistics, University of Innsbruck.
    11. Howard C. Kunreuther & Erwann O. Michel-Kerjan, 2007. "Evaluating The Effectiveness of Terrorism Risk Financing Solutions," NBER Working Papers 13359, National Bureau of Economic Research, Inc.
    12. 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.
    13. 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.
    14. Oberlack, Christoph & Neumärker, Bernhard, 2011. "Economics, institutions and adaptation to climate change," The Constitutional Economics Network Working Papers 04-2011, University of Freiburg, Department of Economic Policy and Constitutional Economic Theory.
    15. Marielle Brunette & Laure Cabantous & Stéphane Couture & Anne Stenger, 2008. "Insurance Demand for Disaster-type Risks and the Separation of Attitudes toward Risk and Ambiguity: an Experimental Study," Working Papers - Cahiers du LEF 2008-05, Laboratoire d'Economie Forestiere, AgroParisTech-INRA.

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