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Collective Risks in Local Administrations: Can a Private Insurer Be Better than a Public Mutual Fund?

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Author Info
Luigi Buzzacchi () (Department of Production Systems and Business Economics, Polytechnic University of Torino)
Gilberto Turati () (Department of Economics and Public Finance "G. Prato", University of Torino)

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Abstract

In this paper we consider the institutional arrangements needed in a decentralised framework to cope with the potential adverse welfare effects caused by localized negative shocks (e.g., natural disasters, terrorist attacks, or even clinical errors) that can be limited by precautionary investments. We model the role of a public mutual fund to cover these “collective risks”. We start from the under-investment problem stemming from the moral hazard of Local administrations when the fund is managed by the Central government, which also takes into account the equalisation of resources across administrations. We then study the potential role of private insurers in solving the under-investment problem. Our analysis shows that the public fund is always superior to the private insurance solution in the presence of hard budget constraints. However, when the Central government cannot credibly commit to an optimal transfer rule, private insurers are sometimes able to improve on the public mutual fund solution by inducing a higher level of investments.

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File URL: http://web.econ.unito.it/prato/papers/n3.pdf
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File Function: First version, 2009
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Publisher Info
Paper provided by University of Torino, Department of Economics and Public Finance "G. Prato" in its series Working Papers with number 3.

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Length: 24 pages
Date of creation: Mar 2009
Date of revision:
Handle: RePEc:tur:wpaper:3

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Related research
Keywords: intergovernmental relations; private insurer; collective risks;

Find related papers by JEL classification:
H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies

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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.:
  1. Pierre Picard, 2008. "Natural Disaster Insurance and the Equity-Efficiency Trade-Off," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 75(1), pages 17-38. [Downloadable!] (restricted)
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  2. Krupa S. Viswanathan & J. David Cummins, 2003. "Ownership Structure Changes in the Insurance Industry: An Analysis of Demutualization," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 70(3), pages 401-437. [Downloadable!] (restricted)
  3. Arrow, Kenneth J & Lind, Robert C, 1970. "Uncertainty and the Evaluation of Public Investment Decisions," American Economic Review, American Economic Association, vol. 60(3), pages 364-78, June.
  4. Timothy J. Goodspeed & Andrew Haughwout, 2007. "On the Optimal Design of Disaster Insurance in a Federation," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
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This page was last updated on 2009-11-12.

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