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Should policy be concerned with objective or subjective risks?

Author

Listed:
  • Johansson-Stenman, Olof

    (Department of Economics, School of Economics and Commercial Law, Göteborg University)

Abstract

Much psychological evidence suggests that people’s risk-perceptions are biased. This paper assumes that public policy should intrinsically be concerned with people’s expected welfare, rather than their preferences, which sometimes implies a degree of paternalism. Still, expected welfare depends on both objective and subjective risks. The latter are important through mental suffering associated with the risk, and through secondbest considerations in decentralized markets where people make their own choices between risky alternatives. Optimality rules for both public provision of risk-reducing investments, and for provision of (costly) information to reduce people’s risk-perception bias, are presented.

Suggested Citation

  • Johansson-Stenman, Olof, 2003. "Should policy be concerned with objective or subjective risks?," Working Papers in Economics 93, University of Gothenburg, Department of Economics.
    • Handle: RePEc:hhs:gunwpe:0093
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    File URL: http://hdl.handle.net/2077/2821
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    References listed on IDEAS

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    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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