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Public Self-Insurance and the Samaritan’s Dilemma in a Federation

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  • Tim Lohse
  • Julio R. Robledo

Abstract

Motivated by recent disasters, this article 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 self-insurance to reduce the size of the loss. Being part of a federation has two countervailing welfare effects. On 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 to variable transfers. This induces regions that behave noncooperatively to choose the efficient level of self-insurance effort.

Suggested Citation

  • Tim Lohse & Julio R. Robledo, 2013. "Public Self-Insurance and the Samaritan’s Dilemma in a Federation," Public Finance Review, , vol. 41(1), pages 92-120, January.
  • Handle: RePEc:sae:pubfin:v:41:y:2013:i:1:p:92-120
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    References listed on IDEAS

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    Cited by:

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

    More about this item

    Keywords

    intergovernmental transfers; self-insurance; disaster policy;

    JEL classification:

    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures

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