Working Paper: NBER ID: w20192
Authors: Steven Shavell
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: No keywords provided
JEL Codes: D6; D8; K2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government relief (H84) | Individual welfare (I31) |
| Number of accidents (J28) | Marginal utility of income for accident victims (J17) |
| Public goods expenditures (H49) | Individual welfare (I31) |
| Number of accidents (J28) | Individual wealth after accidents (G52) |
| Government relief (H84) | Expected utility for individuals (D11) |