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Public self-insurance and the Samaritan's dilemma in a federation

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  • Lohse, Tim
  • Robledo, Julio R.

Abstract

Motivated by recent disasters, this paper analyzes the risk sharing aspect in a federation. The regions can be hit by a shock leading to losses that occur with an exogenous probability and in a stochastically independent way. The regions can spend effort on selfinsurance to reduce the size of the loss. Being part of a federation has two countervailing -elfare effects. On the one hand, there is the well known welfare increase due to risk pooling. On the other hand, the self-insurance effort is a public good, because all regions benefit from the reduction of the loss. There exists a Samaritan's dilemma kind of effect whereby regions reduce their self-insurance effort potentially leading to an overall welfare decrease. The central government can solve this dilemma by committing to fixed rather than variable transfers. This induces regions that behave non-cooperatively to still choose the efficient level of self-insurance effort. --

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Bibliographic Info

Paper provided by Social Science Research Center Berlin (WZB) in its series Discussion Papers, Research Professorship & Project "The Future of Fiscal Federalism" with number SP II 2012-103.

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Date of creation: 2012
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Handle: RePEc:zbw:wzbfff:spii2012103

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Keywords: intergovernmental transfers; self-insurance; disaster policy;

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Cited by:
  1. Timothy J. Goodspeed, 2013. "Decentralization and Natural Disasters," CESifo Working Paper Series 4179, CESifo Group Munich.

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