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Should policy be concerned with objective or subjective risks?

  • Johansson-Stenman, Olof

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

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.

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File URL: http://hdl.handle.net/2077/2821
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Paper provided by University of Gothenburg, Department of Economics in its series Working Papers in Economics with number 93.

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Length: 18 pages
Date of creation: 28 Mar 2003
Date of revision:
Handle: RePEc:hhs:gunwpe:0093
Contact details of provider: Postal: Department of Economics, School of Business, Economics and Law, University of Gothenburg, Box 640, SE 405 30 GÖTEBORG, Sweden
Phone: 031-773 10 00
Web page: http://www.handels.gu.se/econ/

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  1. Fredrik Carlsson & Olof Johansson-Stenman & Peter Martinsson, 2004. "Is Transport Safety More Valuable in the Air?," Journal of Risk and Uncertainty, Springer, vol. 28(2), pages 147-163, 03.
  2. Kahneman, Daniel & Ritov, Ilana & Schkade, David A, 1999. "Economic Preferences or Attitude Expressions?: An Analysis of Dollar Responses to Public Issues," Journal of Risk and Uncertainty, Springer, vol. 19(1-3), pages 203-35, December.
  3. Matthew Rabin, 2003. "A Perspective on Psychology and Economics," General Economics and Teaching 0303003, EconWPA.
  4. Kahneman, Daniel & Wakker, Peter P & Sarin, Rakesh, 1997. "Back to Bentham? Explorations of Experienced Utility," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 375-405, May.
  5. Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
  6. Diamond, Peter, 2002. "Public Finance Theory - Then and Now," Journal of Public Economics, Elsevier, vol. 86(3), pages 311-317, December.
  7. Peltzman, Sam, 1975. "The Effects of Automobile Safety Regulation," Journal of Political Economy, University of Chicago Press, vol. 83(4), pages 677-725, August.
  8. Pollak, Robert A, 1998. "Imagined Risks and Cost-Benefit Analysis," American Economic Review, American Economic Association, vol. 88(2), pages 376-80, May.
  9. Harsanyi, J.C., 1992. "Utilities, Preferences and Substantive Goods," Research Paper 101, World Institute for Development Economics Research.
  10. Yew-Kwang Ng, 1999. "Utility, informed preference, or happiness: Following Harsanyi's argument to its logical conclusion," Social Choice and Welfare, Springer, vol. 16(2), pages 197-216.
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