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A general rationale for a governmental role in the relief of large risks

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  • Steven Shavell

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Abstract

The government often provides relief against large risks, such as disasters. A simple, general rationale for this role of government is considered here that applies even when private contracting to share risks is not subject to market imperfections. Specifically, the optimal private sharing of large risks will not result in complete coverage against them. Hence, when such risks eventuate, the marginal utility to individuals of government relief may exceed the marginal value of public goods. Consequently, social welfare may be raised if the government reduces public goods expenditures and directs these freed resources toward individuals who have suffered losses. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • Steven Shavell, 2014. "A general rationale for a governmental role in the relief of large risks," Journal of Risk and Uncertainty, Springer, vol. 49(3), pages 213-234, December.
  • Handle: RePEc:kap:jrisku:v:49:y:2014:i:3:p:213-234
    DOI: 10.1007/s11166-014-9203-2
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    References listed on IDEAS

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    1. Kenneth A. Froot, 1999. "Introduction to "The Financing of Catastrophe Risk"," NBER Chapters,in: The Financing of Catastrophe Risk, pages 1-22 National Bureau of Economic Research, Inc.
    2. Dwight M. Jaffee & Thomas Russell, 1996. "Catastrophe Insurance, Capital Markets and Uninsurable Risks," Center for Financial Institutions Working Papers 96-12, Wharton School Center for Financial Institutions, University of Pennsylvania.
    3. Philip J. Cook & Daniel A. Graham, 1977. "The Demand for Insurance and Protection: The Case of Irreplaceable Commodities," The Quarterly Journal of Economics, Oxford University Press, vol. 91(1), pages 143-156.
    4. Kenneth A. Froot, 1999. "The Financing of Catastrophe Risk," NBER Books, National Bureau of Economic Research, Inc, number froo99-1, June.
    5. Froot, Kenneth A., 2001. "The market for catastrophe risk: a clinical examination," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 529-571, May.
    6. Priest, George L, 1996. "The Government, the Market, and the Problem of Catastrophic Loss," Journal of Risk and Uncertainty, Springer, vol. 12(2-3), pages 219-237, May.
    7. Kaplow, Louis, 1991. "Incentives and Government Relief for Risk," Journal of Risk and Uncertainty, Springer, vol. 4(2), pages 167-175, April.
    8. 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 364-378, June.
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    Cited by:

    1. repec:kap:jrisku:v:55:y:2017:i:1:d:10.1007_s11166-017-9263-1 is not listed on IDEAS
    2. repec:ags:jlaare:264070 is not listed on IDEAS

    More about this item

    Keywords

    Government relief; Large risks; Insurance; D6; D8; K2;

    JEL classification:

    • D6 - Microeconomics - - Welfare Economics
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • K2 - Law and Economics - - Regulation and Business Law

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