NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

A General Rationale for a Governmental Role in the Relief of Large Risks

Steven Shavell

NBER Working Paper No. 20192
Issued in June 2014
NBER Program(s):   LE   PE

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.

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Document Object Identifier (DOI): 10.3386/w20192

 
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