Preventing Controversial Catastrophes

Review of Asset Pricing Studies, Forthcoming

89 Pages Posted: 19 Aug 2016 Last revised: 4 Oct 2018

See all articles by Steven D. Baker

Steven D. Baker

University of Virginia - McIntire School of Commerce

Burton Hollifield

Carnegie Mellon University - David A. Tepper School of Business

Emilio Osambela

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: July 18, 2018

Abstract

In a market-based democracy, we model different constituencies that disagree regarding the likelihood of economic disasters. Costly public policy initiatives to reduce or eliminate disasters are assessed relative to private alternatives presented by financial markets. Demand for such public policies falls as much as 40% with disagreement, and crowding out by private insurance drives most of the reduction. As support for disaster-reducing policy jumps in periods of disasters, costly policies may be adopted only after disasters occur. In some scenarios constituencies may even demand policies oriented to increase disaster risk if these policies introduce speculative opportunities.

Keywords: Crowding out, Disagreement, Disaster Risk, Government policy, Wllingness to Pay

JEL Classification: D78, E44, E61, G01, G18, H21, H23

Suggested Citation

Baker, Steven D. and Hollifield, Burton and Osambela, Emilio, Preventing Controversial Catastrophes (July 18, 2018). Review of Asset Pricing Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2824702 or http://dx.doi.org/10.2139/ssrn.2824702

Steven D. Baker

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States

HOME PAGE: http://faculty.comm.virginia.edu/sdb7e/

Burton Hollifield

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
(412) 268-6505 (Phone)
(412) 268-6837 (Fax)

Emilio Osambela (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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