Working Paper: NBER ID: w3006
Authors: Louis Kaplow
Abstract: A significant source of risk arises from uncertainty concerning future government policy. Government action - - tax reform, deregulation, judicial decisions, budgetary shifts - - produces gains and losses for those who invested under preexisting rules. The effects of government relief - - compensation, grandfathering, phase-ins - - on ex ante incentives and risk bearing are examined in a model in which private insurance is taken into account. It is demonstrated that government relief is inefficient, even when private insurance is subject to moral hazard, because relief shields individuals from some of the effects of their actions.
Keywords: government relief; investment incentives; moral hazard; insurance markets; transition policy
JEL Codes: H21; H23; K32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government relief (H84) | inefficiencies (D61) |
| government relief (H84) | shielding investors from consequences (G18) |
| government relief (H84) | distortion of ex ante investment decisions (H32) |
| government relief (H84) | moral hazard (G52) |
| government relief (H84) | suboptimal investment levels (E22) |
| government relief (H84) | inefficiencies associated with full retroactive application of new policies (H21) |
| private insurance (G52) | compensation (M52) |
| government relief (H84) | interaction with private insurance (I13) |