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Title:Public self-insurance and the Samaritan's dilemma in a federation PDF Logo
Authors:Lohse, Tim
Robledo, Julio R.
Issue Date:2012
Series/Report no.:WZB Discussion Paper SP II 2012-103
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.
Subjects:intergovernmental transfers
self-insurance
disaster policy
JEL:H77
H41
H72
Document Type:Working Paper
Appears in Collections:Publikationen von Forscherinnen und Forschern des WZB
Discussion Papers, Forschungsprofessur & Projekt "The Future of Fiscal Federalism"

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