Preventing Controversial Catastrophes

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: Suggested Citation

Baker, Steven D. and Hollifield, Burton and Osambela, Emilio, Preventing Controversial Catastrophes (July 18, 2018). Review of Asset Pricing Studies 10(1): 1–60, 2020, Available at SSRN: https://ssrn.com/abstract=2824702 or http://dx.doi.org/10.2139/ssrn.2824702