Public Self-Insurance and the Samaritan‘s Dilemma in a Federation
Berlin School of Economics and Law; Wissenschaftszentrum Berlin für Sozialforschung (WZB)
Julio R. Robledo
Ruhr Universität Bochum
April 1, 2012
Ruhr Economic Paper No. 330
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 selfinsurance 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.
Number of Pages in PDF File: 30
Keywords: Intergovernmental transfers, self-insurance, disaster policy
JEL Classification: H77, H41, H72Accepted Paper Series
Date posted: June 15, 2012
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