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Public self-insurance and the Samaritan's dilemma in a federation
[working paper]
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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 lo... view more
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)... view less
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
Handle
https://hdl.handle.net/10419/56051
Status
Published Version; reviewed
Licence
Deposit Licence - No Redistribution, No Modifications