Finance and Economics Discussion Series (FEDS)

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July 2018

Preventing Controversial Catastrophes

Steven D. Baker, Burton Hollifield, and Emilio Osambela

Abstract:

In a market-based democracy, we model different constituencies that disagree regarding the likelihood of economic disasters. Costly public policy initiatives to reduce or eliminate disasters are assessed relative to private alternatives presented by financial markets. Demand for such public policies falls as much as 40% with disagreement, and crowding out by private insurance drives most of the reduction. As support for disaster-reducing policy jumps in periods of disasters, costly policies may be adopted only after disasters occur. In some scenarios constituencies may even demand policies oriented to increase disaster risk if these policies introduce speculative opportunities.

Accessible materials (.zip)

Keywords: Crowding out, Disagreement, Disaster risk, Government policy, Willingness to pay

DOI: https://doi.org/10.17016/FEDS.2018.052

PDF: Full Paper

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Last Update: January 09, 2020