NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Government Relief for Risk Associated with Government Action

Louis Kaplow

NBER Working Paper No. 3006 (Also Reprint No. r1768)*
Issued in January 1993
NBER Program(s):   PE

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.

*Published: Scandanavian Journal of Economics, Vol. 94, No. 4, pp. 525-541 (1992).

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