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Public Self-Insurance and the Samaritan's Dilemma in a Federation

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  • Lohse, Tim
  • Robledo, Julio R.

Abstract

Motivated by recent disasters, this paper analyzes the risk sharing aspect in a federation. The regions can be hit by a shock leading to losses that occur with an exogenous probability and in a stochastically independent way. The regions can spend effort on self-insurance to reduce the size of the loss. Being part of a federation has two countervailing welfare effects. On the one hand, there is the well known welfare increase due to risk pooling. On the other hand, the self-insurance effort is a public good, because all regions benefit from the reduction of the loss. There exists a Samaritan's dilemma kind of effect whereby regions reduce their self-insurance effort potentially leading to an overall welfare decrease. The central government can solve this dilemma by committing to fixed rather than to variable transfers. This induces regions that behave noncooperatively to choose the efficient level of self-insurance effort.

Suggested Citation

  • Lohse, Tim & Robledo, Julio R., 2012. "Public Self-Insurance and the Samaritan's Dilemma in a Federation," Ruhr Economic Papers 330, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    • Handle: RePEc:zbw:rwirep:330
    DOI: 10.4419/86788379
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    3. Timothy J. Goodspeed, 2013. "Decentralization and Natural Disasters," CESifo Working Paper Series 4179, CESifo.
    4. Carla Morvan, 2022. "Municipalities' budgetary response to natural disasters," Working Papers halshs-03684732, HAL.

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    More about this item

    Keywords

    Intergovernmental transfers; self-insurance; disaster policy;
    All these keywords.

    JEL classification:

    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures

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