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Government Relief for Risk Associated with Government Action

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  • Louis Kaplow

Abstract

A significant source of risk arises from uncertainty concerning future government policy. Government action - - tax reform, deregulation, judicial decisions, budgetary shifts - - produces gains and losses for those who invested under preexisting rules. The effects of government relief - - compensation, grandfathering, phase-ins - - on ex ante incentives and risk bearing are examined in a model in which private insurance is taken into account. It is demonstrated that government relief is inefficient, even when private insurance is subject to moral hazard, because relief shields individuals from some of the effects of their actions.

Suggested Citation

  • Louis Kaplow, 1989. "Government Relief for Risk Associated with Government Action," NBER Working Papers 3006, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:3006
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    1. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, vol. 51(1), pages 7-45, January.
    2. Kaplow, Louis, 1989. "Horizontal Equity: Measures in Search of a Principle," National Tax Journal, National Tax Association, vol. 42(2), pages 139-54, June.
    3. Louis Kaplow, 1985. "Horizontal Equity: Measures in Search of a Principle," NBER Working Papers 1679, National Bureau of Economic Research, Inc.
    4. Arnott, Richard & Stiglitz, Joseph E., 1986. "Moral hazard and optimal commodity taxation," Journal of Public Economics, Elsevier, vol. 29(1), pages 1-24, February.
    5. Kaplow, Louis, 1989. "Horizontal Equity: Measures in Search of a Principle," National Tax Journal, National Tax Association;National Tax Journal, vol. 42(2), pages 139-154, June.
    6. Zodrow, George R., 1985. "Optimal tax reform in the presence of adjustment costs," Journal of Public Economics, Elsevier, vol. 27(2), pages 211-230, July.
    7. Steven Shavell, 1979. "On Moral Hazard and Insurance," The Quarterly Journal of Economics, Oxford University Press, vol. 93(4), pages 541-562.
    8. Arnott, Richard J & Stiglitz, Joseph E, 1988. " The Basic Analytics of Moral Hazard," Scandinavian Journal of Economics, Wiley Blackwell, vol. 90(3), pages 383-413.
    9. 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.
    10. Kaplow, Louis, 1993. "An ex ante perspective on deregulation, viewed ex post," Resource and Energy Economics, Elsevier, vol. 15(2), pages 153-173, June.
    11. 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.
    12. Richard Arnott & Joseph Stiglitz, 1991. "Equilibrium in Competitive Insurance Markets with Moral Hazard," NBER Working Papers 3588, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Thomas J. Miceli & Kathleen Segerson, 2011. "Regulatory Takings," Working papers 2011-16, University of Connecticut, Department of Economics.
    2. Louis Kaplow, 2010. "Taxes, Permits, and Climate Change," NBER Working Papers 16268, National Bureau of Economic Research, Inc.
    3. Steven Shavell, 2014. "Risk Aversion and the Desirability of Attenuated Legal Change," NBER Working Papers 19879, National Bureau of Economic Research, Inc.
    4. Rachel J. Huang & Larry Y. Tzeng, 2007. "Optimal Tax Deductions for Net Losses Under Private Insurance With an Upper Limit," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 74(4), pages 883-893.
    5. Hans-Bernd Schäfer & Ram Singh, 2017. "Takings of Land by Self-interested Governments Economic Analysis of Eminent Domain," Working papers 281, Centre for Development Economics, Delhi School of Economics.
    6. Gilbert E. Metcalf, 2014. "Using the Tax System to Address Competition Issues With a Carbon Tax," National Tax Journal, National Tax Association;National Tax Journal, vol. 67(4), pages 779-806, December.
    7. Louis Kaplow, 2003. "Transition Policy: A Conceptual Framework," NBER Working Papers 9596, National Bureau of Economic Research, Inc.
    8. Rachel J. Huang & Larry Y. Tzeng, 2008. "Consumption Externality and Equilibrium Underinsurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 75(4), pages 1039-1054.
    9. Ackerman, Frank & Biewald, Bruce & White, David & Woolf, Tim & Moomaw, William, 1999. "Grandfathering and coal plant emissions: the cost of cleaning up the Clean Air Act," Energy Policy, Elsevier, vol. 27(15), pages 929-940, December.

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