Ruhr Economic Papers
Ruhr Economic Papers #330
Public Self-Insurance and the Samaritan‘s Dilemma in a Federation
by Tim Lohse and Julio R. Robledo
RUB, 04/2012, 28 S./p., 8 Euro, ISBN 978-3-86788-379-5 DOI: 10.4419/86788379download
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 self-insurance to reduce the size of the loss. Being part of a federation has two countervailing welfare 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 to variable transfers. This induces regions that behave noncooperatively to choose the effi cient level of self-insurance effort.
JEL-Classification: H77, H41, H72
Keywords: Intergovernmental transfers; self-insurance; disaster policy