Optimal risk allocation in the provision of local public services: can a private insurer be better than a public mutual fund?

Gilberto Turati () and Luigi Buzzacchi ()
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Luigi Buzzacchi: Politecnico di Torino, DISPEA

No 2009/21, Working Papers from Institut d'Economia de Barcelona (IEB)

Abstract: In this paper we consider the institutional arrangements needed in a decentralised framework to cope with the potential adverse welfare effects caused by localized negative shocks, that impact on the provision of public services and that can be limited by precautionary investments. We model the role of a public mutual fund to cover these “collective risks”. We first study the under-investment problem stemming from the moral hazard of Local administrations, when investments are defined at the local level and are not observable by the Central government that manages the mutual fund. We then examine the potential role of private insurers in solving the underinvestment problem. Our analysis shows that the public fund is almost always superior to the private insurance solution.

Keywords: intergovernmental transfers; private insurer; collective risks (search for similar items in EconPapers)
JEL-codes: G22 H23 H77 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2009
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Citations: View citations in EconPapers (2)

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