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Public self-insurance and the Samaritan's dilemma in a federation

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Lohse, Tim; Robledo, Julio R.

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Corporate Editor Wissenschaftszentrum Berlin für Sozialforschung gGmbH
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 selfinsurance to reduce the size of the loss. Being part of a federation has two countervailing-elfare 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 variable transfers. This induces regions that behave non-cooperatively to still choose the efficient level of self-insurance effort. (author's abstract)
Keywords theory; transfer; national state; politics; disaster; fiscal equalization
Classification Economic Policy
Free Keywords Selbstversicherung
Document language English
Publication Year 2012
City Berlin
Page/Pages 25 p.
Series Discussion Papers / Wissenschaftszentrum Berlin für Sozialforschung, Schwerpunkt Märkte und Politik, Forschungsprofessur und Projekt The Future of Fiscal Federalism, SP II 2012-103
Status Published Version; reviewed
Licence Deposit Licence - No Redistribution, No Modifications