A general rationale for a governmental role in the relief of large risks

Steven Shavell

doi:10.1007/s11166-014-9203-2

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 large risks will not result in complete coverage against them. Hence, when such risks eventuate, the marginal utility to individuals of government 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.

Highlights

The government plays a well-recognized role in providing relief against many large risks
The rationale, in essence, is that the optimal private sharing of very large risks will not result in complete coverage against them
Concluding Remarks To recapitulate, it was shown in the world of a simple model that the government can raise social welfare by giving aid when substantial, especially correlated, adverse outcomes occur

Summary

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Steven Shavell, A General Rationale for a Governmental Role in the Relief of Large Risks Olin Center for Law, Economics, and Business, Discussion Paper No 768, May 2014). A GENERAL RATIONALE FOR A GOVERNMENTAL ROLE IN THE RELIEF OF LARGE RISKS Steven Shavell

Steven Shavell*

Introduction