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Optimal risk allocation in the provision of local public services: can a private insurer be better than a public mutual fund?

Author

Listed:
  • Gilberto Turati

    () (Università di Torino)

  • Luigi Buzzacchi

    () (Politecnico di Torino, DISPEA)

Abstract

In this paper we consider the institutional arrangements needed in a decentralised framework to cope with the potential adverse welfare effects caused by localized negative shocks, that impact on the provision of public services and that can be limited by precautionary investments. We model the role of a public mutual fund to cover these “collective risks”. We first study the under-investment problem stemming from the moral hazard of Local administrations, when investments are defined at the local level and are not observable by the Central government that manages the mutual fund. We then examine the potential role of private insurers in solving the underinvestment problem. Our analysis shows that the public fund is almost always superior to the private insurance solution.

Suggested Citation

  • Gilberto Turati & Luigi Buzzacchi, 2009. "Optimal risk allocation in the provision of local public services: can a private insurer be better than a public mutual fund?," Working Papers 2009/21, Institut d'Economia de Barcelona (IEB).
  • Handle: RePEc:ieb:wpaper:2009/10/doc2009-21
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    File URL: http://ieb.ub.edu/aplicacio/fitxers/2009/10/Doc2009-21.pdf
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    References listed on IDEAS

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    1. Pierre Picard, 2008. "Natural Disaster Insurance and the Equity-Efficiency Trade-Off," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 75(1), pages 17-38.
    2. David E. Wildasin, 2008. "Disaster Policies," Public Finance Review, , vol. 36(4), pages 497-518, July.
    3. Timothy Goodspeed & Andrew Haughwout, 2012. "On the optimal design of disaster insurance in a federation," Economics of Governance, Springer, vol. 13(1), pages 1-27, March.
    4. Fredrik Carlsson & Dinky Daruvala & Olof Johansson-Stenman, 2005. "Are People Inequality-Averse, or Just Risk-Averse?," Economica, London School of Economics and Political Science, vol. 72(3), pages 375-396, August.
    5. 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. Timothy Goodspeed & Andrew Haughwout, 2012. "On the optimal design of disaster insurance in a federation," Economics of Governance, Springer, vol. 13(1), pages 1-27, March.
    2. Timothy J. Goodspeed, 2013. "Decentralization and Natural Disasters," CESifo Working Paper Series 4179, CESifo Group Munich.

    More about this item

    Keywords

    intergovernmental transfers; private insurer; collective risks;

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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