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Risk reduction and public spending

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  • Devarajan, Shantayanan
  • Hammer, Jeffrey S.

Abstract

As governments grow richer, the share of their GDP devoted to public spending rises. Public spending in the United States was 7.5 percent of GDP in 1913. It is 33 percent today. Although industrial countries spend twice as much as developing countries, government spending on goods and services is the same in both groups of countries. The difference is almost entirely due to transfer payments, which are about 22 percent of GDP in the industrial world. Most of these transfer payments - pensions, health insurance, unemployment insurance, guaranteed loans- are aimed at mitigating risk in the private sector The authors explore how the framework for evaluating government spending on goods and services can be extended to incorporate the government's various risk-reducing activities. The authors argue that there is a case for incorporating risk reduction into government spending, if doing so meets standard welfare-economics criteria for government intervention in the economy. Through examples - government-provided health insurance and crop insurance, price stabilization schemes, transfer programs for income support, public investments, publicly provided health care, and government credit guarantees - they show where government spending on risk reduction could improve welfare, by either alleviating a failure in risk markets or by reducing uncertainty in otherwise distorted markets. They illustrate calculations of the risk-reduction benefits of public spending and cite cases where their neglect could lead to serious underestimates.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1869.

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Date of creation: 31 Jan 1998
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Handle: RePEc:wbk:wbrwps:1869

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Related research

Keywords: Environmental Economics&Policies; Labor Policies; Payment Systems&Infrastructure; Health Economics&Finance; Banks&Banking Reform; Insurance&Risk Mitigation; Banks&Banking Reform; Insurance Law; Health Economics&Finance; Environmental Economics&Policies;

References

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  1. Tanzi, Vito & Schuknecht, Ludger, 1997. "Reconsidering the Fiscal Role of Government: The International Perspective," American Economic Review, American Economic Association, American Economic Association, vol. 87(2), pages 164-68, May.
  2. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, American Economic Association, vol. 71(3), pages 393-410, June.
  3. Donald Cox & Emmanuel Jiminez, 1993. "Private Transfers And The Effectiveness Of Public Income Redistribution In The Philippines," Boston College Working Papers in Economics, Boston College Department of Economics 236, Boston College Department of Economics.
  4. Lant Pritchett, 1997. "Divergence, Big Time," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 11(3), pages 3-17, Summer.
  5. Hammer, Jeffrey S, 1997. "Economic Analysis for Health Projects," World Bank Research Observer, World Bank Group, World Bank Group, vol. 12(1), pages 47-71, February.
  6. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 90(4), pages 630-49, November.
  7. Arrow, Kenneth J & Lind, Robert C, 1970. "Uncertainty and the Evaluation of Public Investment Decisions," American Economic Review, American Economic Association, American Economic Association, vol. 60(3), pages 364-78, June.
  8. Alderman, Harold & Lavy, Victor, 1996. "Household Responses to Public Health Services: Cost and Quality Tradeoffs," World Bank Research Observer, World Bank Group, World Bank Group, vol. 11(1), pages 3-22, February.
  9. Greenwald, Bruce C & Stiglitz, Joseph E, 1986. "Externalities in Economies with Imperfect Information and Incomplete Markets," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 101(2), pages 229-64, May.
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Cited by:
  1. Dailami, Monsoor, 2000. "Financial openness, democracy, and redistributive policy," Policy Research Working Paper Series 2372, The World Bank.
  2. World Bank, 2001. "Brazil - Public Expenditures for Poverty Alleviation in Northeast Brazil : Promoting Growth and Improving Services," World Bank Other Operational Studies 15510, The World Bank.

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