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Rules Rather Than Discretion: Lessons from Hurricane Katrina

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  • Howard Kunreuther
  • Mark Pauly

Abstract

This paper explores options for programs to be put in place prior to a disaster to avoid large and often poorly-managed expenditures following a catastrophe and to provide appropriate protection against the risk of those large losses which do occur. The lack of interest in insurance protection and mitigation by property owners and by public sector agencies prior to a disaster often creates major problems following a catastrophic event for victims and the government. Property owners who suffer severe damage may not have the financial resources easily at hand to rebuild their property and hence will demand relief. The government is then likely to respond with costly but poorly targeted disaster assistance. To avoid these large and often uneven ex post expenditures, we consider the option of mandatory comprehensive private disaster insurance with risk based rates. It may be more efficient to have an ex ante public program to ensure coverage of catastrophic losses and to subsidize low income residents who cannot afford coverage rather than the current largely ex post public disaster relief program.

Suggested Citation

  • Howard Kunreuther & Mark Pauly, 2006. "Rules Rather Than Discretion: Lessons from Hurricane Katrina," NBER Working Papers 12503, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:12503
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    References listed on IDEAS

    as
    1. Kunreuther, Howard & Novemsky, Nathan & Kahneman, Daniel, 2001. "Making Low Probabilities Useful," Journal of Risk and Uncertainty, Springer, vol. 23(2), pages 103-120, September.
    2. Kunreuther, Howard & Sanderson, Warren & Vetschera, Rudolf, 1985. "A behavioral model of the adoption of protective activities," Journal of Economic Behavior & Organization, Elsevier, vol. 6(1), pages 1-15, March.
    3. Kent Smetters, 2005. "Insuring Against Terrorism: The Policy Challenge," NBER Working Papers 11038, National Bureau of Economic Research, Inc.
    4. Hogarth, Robin M & Kunreuther, Howard, 1995. "Decision Making under Ignorance: Arguing with Yourself," Journal of Risk and Uncertainty, Springer, vol. 10(1), pages 15-36, January.
    5. Howard Kunreuther & Mark Pauly, 2004. "Neglecting Disaster: Why Don't People Insure Against Large Losses?," Journal of Risk and Uncertainty, Springer, vol. 28(1), pages 5-21, January.
    6. Neil Doherty & Paul Kleindorfer & Howard Kunreuther, 1990. "Insurance Perspectives on an Integrated Hazardous Waste Management Strategy*," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 15(4), pages 407-427, October.
    7. Daniel McFadden, 2006. "Free Markets and Fettered Consumers," American Economic Review, American Economic Association, vol. 96(1), pages 5-29, March.
    8. Colin F. Camerer & Howard Kunreuther, 1989. "Decision processes for low probability events: Policy implications," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 8(4), pages 565-592.
    9. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
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    More about this item

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H44 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Goods: Mixed Markets

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