Abstract
In a risky world, should governments provide public goods that reduce risk or compensate the victims of bad outcomes? We examine the allocation of public expenditures in the context of a risky environment between the provision of a public good with risk-reducing characteristics, and the expansion of a tax-financed public insurance system. We allow for the existence of a private insurance market as well, and therefore for the possibility of crowding out by a public insurance scheme. Nevertheless, we find there is scope for substantial spending on insurance, especially as risk aversion and the size of the total budget grows.
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