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|Title:||Public self-insurance and the Samaritan's dilemma in a federation |
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.|
|Document Type:||Working Paper|
|Appears in Collections:||Discussion Papers, Forschungsprofessur & Projekt "The Future of Fiscal Federalism"|
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