On the Political Economy and Limits of Crisis Insurance: The Case of the 2008–11 Bailouts

38 Pages Posted: 15 Nov 2010 Last revised: 3 Nov 2011

Roger D. Congleton

West Virginia University - Department of Economics; George Mason University - Center for Study of Public Choice

Date Written: November 3, 2011

Abstract

The bailouts of 2008–10 are the most recent in a long series of in-surance-like policies designed to limit the losses of those harmed by a crisis of some kind — but enacted after a crisis is under way.

This paper analyzes the economics and politics of “crisis insurance” programs. The analysis helps explain why ex-post insurance is popular, why it tends to be undersupplied by private markets, and why governments may be better able to provide it. The analysis also points out that there are limits to what losses can be covered. The routine adoption of new programs to limit losses from crises tends to require greater expenditures through time because of moral hazard problems and the nature of crises. Eventually, this trend may produce “uninsurable” crises.

The analysis of this paper suggests that such problems can be moderated, al-though not eliminated, through appropriate standing polices for ex post funding of crisis insurance.

Keywords: Financial Crisis, Social Insurance, Political Economy, Crisis Management, Crisis Insurance, Bailouts

JEL Classification: D72, D73, D8, K2

Suggested Citation

Congleton, Roger D., On the Political Economy and Limits of Crisis Insurance: The Case of the 2008–11 Bailouts (November 3, 2011). Available at SSRN: https://ssrn.com/abstract=1709482 or http://dx.doi.org/10.2139/ssrn.1709482

Roger D. Congleton (Contact Author)

West Virginia University - Department of Economics ( email )

PO Box 6025
Morgantown, WV 26506
United States

HOME PAGE: http://rdc1.net

George Mason University - Center for Study of Public Choice ( email )

4400 University Drive
Fairfax, VA 22030
United States

HOME PAGE: http://rdc1.net

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