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Public self-insurance and the Samaritan's dilemma in a federation

Tim Lohse () and Julio R. Robledo ()

No SP II 2012-103, Discussion Papers, Research Professorship & Project "The Future of Fiscal Federalism" from Social Science Research Center Berlin (WZB)

Abstract: Motivated by recent disasters, this paper analyzes the risk sharing aspect in a federation. The regions can be hit by a shock leading to losses that occur with an exogenous probability and in a stochastically independent way. The regions can spend effort on selfinsurance to reduce the size of the loss. Being part of a federation has two countervailing -elfare effects. On the one hand, there is the well known welfare increase due to risk pooling. On the other hand, the self-insurance effort is a public good, because all regions benefit from the reduction of the loss. There exists a Samaritan's dilemma kind of effect whereby regions reduce their self-insurance effort potentially leading to an overall welfare decrease. The central government can solve this dilemma by committing to fixed rather than variable transfers. This induces regions that behave non-cooperatively to still choose the efficient level of self-insurance effort.

Keywords: intergovernmental transfers; self-insurance; disaster policy (search for similar items in EconPapers)
JEL-codes: H77 H41 H72 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ias
Date: 2012
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http://econstor.eu/bitstream/10419/56051/1/688719341.pdf (application/pdf)

Related works:
Journal Article: Public Self-Insurance and the Samaritan’s Dilemma in a Federation (2013) Downloads
Working Paper: Public Self-Insurance and the Samaritan‘s Dilemma in a Federation (2012) Downloads
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