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A General Rationale for a Governmental Role in the Relief of Large Risks

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  • Steven Shavell

Abstract

The government often provides relief against large risks, such as disasters. A simple, general rationale for this role of government is considered here that applies even when private contracting to share risks is not subject to market imperfections. Specifically, the optimal private sharing of risks will not result in complete coverage against them when they are sufficiently large. Hence, when such risks eventuate, the marginal utility to individuals of governmental relief may exceed the marginal value of public goods. Consequently, social welfare may be raised if the government reduces public goods expenditures and directs these freed resources toward individuals who have suffered losses.

Suggested Citation

  • Steven Shavell, 2014. "A General Rationale for a Governmental Role in the Relief of Large Risks," NBER Working Papers 20192, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:20192
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    File URL: http://www.nber.org/papers/w20192.pdf
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    References listed on IDEAS

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    1. Kenneth A. Froot, 1999. "Introduction to "The Financing of Catastrophe Risk"," NBER Chapters, in: The Financing of Catastrophe Risk, pages 1-22, National Bureau of Economic Research, Inc.
    2. Philip J. Cook & Daniel A. Graham, 1977. "The Demand for Insurance and Protection: The Case of Irreplaceable Commodities," The Quarterly Journal of Economics, Oxford University Press, vol. 91(1), pages 143-156.
    3. Kenneth A. Froot, 1999. "The Financing of Catastrophe Risk," NBER Books, National Bureau of Economic Research, Inc, number froo99-1, November.
    4. Froot, Kenneth A., 2001. "The market for catastrophe risk: a clinical examination," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 529-571, May.
    5. Priest, George L, 1996. "The Government, the Market, and the Problem of Catastrophic Loss," Journal of Risk and Uncertainty, Springer, vol. 12(2-3), pages 219-237, May.
    6. Kaplow, Louis, 1991. "Incentives and Government Relief for Risk," Journal of Risk and Uncertainty, Springer, vol. 4(2), pages 167-175, April.
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    Cited by:

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    3. Andrew Royal, 2017. "Dynamics in risk taking with a low-probability hazard," Journal of Risk and Uncertainty, Springer, vol. 55(1), pages 41-69, August.

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    More about this item

    JEL classification:

    • D6 - Microeconomics - - Welfare Economics
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • K2 - Law and Economics - - Regulation and Business Law

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