Addressing Catastrophic Risks: Disparate Anatomies Require Tailored Therapies

REGULATORY BREAKDOWN: THE CRISIS OF CONFIDENCE IN US REGULATION, Cary Coglianese, ed., University of Pennsylvania Press, 2012

Vanderbilt Law and Economics Research Paper No. 11-41

43 Pages Posted: 17 Nov 2011

See all articles by W. Kip Viscusi

W. Kip Viscusi

Vanderbilt University - Law School; National Bureau of Economic Research (NBER); Vanderbilt University - Department of Economics; Vanderbilt University - Owen Graduate School of Management; Vanderbilt University - Strategy and Business Economics

Richard J. Zeckhauser

Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

Date Written: November 1, 2011

Abstract

Catastrophic risks differ in terms of their natural or human origins, their possible amplification by human behaviors, and the relationships between those who create the risks and those who suffer the losses. Given their disparate anatomies, catastrophic risks generally require tailored therapies, with each prescribed therapy employing a specific portfolio of policy strategies. Given that catastrophic risks occur rarely, and impose extreme losses, traditional mechanisms for controlling risks – bargaining, regulation, liability – often function poorly.

Commons catastrophes arise when a group of actors collectively impose such risks on themselves. When the commons is balanced, that is, when the parties are roughly symmetrically situated, a range of regulatory mechanisms can perform well. However, unbalanced commons – such as exist with climate change – will challenge any control mechanism with the disparate parties putting forth proposals to limit their own burdens.

When humans impose catastrophic risks predominantly on others – as with deepwater oil spills – the risks are external. For those risks, the analysis shows, a single responsible party should be identified. Primary emphasis should then be placed on a two-tier liability system. Parties engaged in activities posing such catastrophic risks would be subject to substantial minimum financial requirements, strict liability for all damages, and a risk-based tax for expected losses that would exceed the responsible party’s ability to pay. Utilizing the financial incentives of this two-tier liability system would decrease the current reliance on regulatory policy, and would alter the role of regulators with a tilt toward financial oversight efforts and away from direct control.

Catastrophic risks will always be with us. But as rare, extreme events, society has little experience with them, and current mechanisms are poorly designed to control them. Only a tailored therapy approach offers promise of significant improvement.

Keywords: catastrophe, risk, risk tax, regulation, liability, insurance

JEL Classification: G22, K32, Q3, H0

Suggested Citation

Viscusi, W. Kip and Zeckhauser, Richard J., Addressing Catastrophic Risks: Disparate Anatomies Require Tailored Therapies (November 1, 2011). REGULATORY BREAKDOWN: THE CRISIS OF CONFIDENCE IN US REGULATION, Cary Coglianese, ed., University of Pennsylvania Press, 2012; Vanderbilt Law and Economics Research Paper No. 11-41 . Available at SSRN: https://ssrn.com/abstract=1960742

W. Kip Viscusi (Contact Author)

Vanderbilt University - Law School ( email )

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HOME PAGE: http://law.vanderbilt.edu/faculty/viscusi.htm

National Bureau of Economic Research (NBER)

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Vanderbilt University - Department of Economics

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Nashville, TN 37235
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(615) 343-7715 (Phone)
(615) 343-5953 (Fax)

HOME PAGE: http://law.vanderbilt.edu/faculty/viscusi.htm

Vanderbilt University - Owen Graduate School of Management

401 21st Avenue South
Nashville, TN 37203
United States
(615) 343-7715 (Phone)
(615) 343-5953 (Fax)

HOME PAGE: http://law.vanderbilt.edu/faculty/viscusi.htm

Vanderbilt University - Strategy and Business Economics ( email )

Nashville, TN 37203
United States

Richard J. Zeckhauser

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States
617-495-1174 (Phone)
617-384-9340 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States
617-495-1174 (Phone)
617-496-3783 (Fax)

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