A General Rationale for a Governmental Role in the Relief of Large Risks

Journal of Risk and Uncertainty, Forthcoming

Harvard Law, Economics, and Business Discussion Paper No. 768

33 Pages Posted: 22 May 2014

See all articles by Steven Shavell

Steven Shavell

Harvard Law School; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: May 21, 2014

Abstract

The government often provides relief against large risks, such as disasters. A simple, general rationale for this role of government is considered here that applies even when private contracting to share risks is not subject to market imperfections. Specifically, the optimal private sharing of risks will not result in complete coverage against them when they are sufficiently large. Hence, when such risks eventuate, the marginal utility to individuals of governmental relief may exceed the marginal value of public goods. Consequently, social welfare may be raised if the government reduces public goods expenditures and directs these freed resources toward individuals who have suffered losses.

Keywords: Insurance, disasters, large risks, government

JEL Classification: D6, D8, K2

Suggested Citation

Shavell, Steven, A General Rationale for a Governmental Role in the Relief of Large Risks (May 21, 2014). Journal of Risk and Uncertainty, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2439230

Steven Shavell (Contact Author)

Harvard Law School ( email )

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National Bureau of Economic Research (NBER)

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