The government, the market, and the problem of catastrophic loss

This article addresses the comparative advantage of the government to the private property/casualty insurance industry for the provision of insurance coverage for catastrophic losses. That the government can play an important role as an insurer of societal losses has been a central public policy principle since at least the New Deal. In addition, our government typically automatically provides forms of specific relief following unusually severe or unexpected disasters, which itself can be viewed as a form of ex post insurance. This article argues that, for systemic reasons, the government is much less effective than the private property/casualty insurance market in providing coverage of losses generally, but especially of losses in contexts of catastrophes.     

Adjusting to natural disasters

People adjust to the risks presented by natural disasters in a number of ways; they can move out of harms way, they can self protect, or they can insure. This paper uses Hurricane Andrew, the largest U.S. natural disaster prior to Katrina, to evaluate how people and housing markets respond to a large disaster. Our analysis combines a unique ex post database on the storm’s damage along with information from the 1990 and 2000 Censuses in Dade County, Florida where the storm hit. The results suggest that the economic capacity of households to adjust explains most of the differences in demographic groups’ patterns of adjustment to the hurricane damage. Low income households respond primarily by moving into low-rent housing in areas that experienced heavy damage. Middle income households move away to avoid risk, and the wealthy, for whom insurance and self-protection are most affordable, appear to remain. This pattern of adjustment with respect to income is roughly mean neutral, so an analysis based on measures of central tendency such as median income would miss these important adjustments.     

The catastrophic effects of natural disasters on insurance markets

Natural disasters often have catastrophic risks on insurance companies as well as on the insured. Using a very large dataset on homeowners’ insurance coverage by state, by firm, and by year for the 1984 to 2004 period, this paper documents the positive effect on losses and loss ratios of both unexpected catastrophes as well as large events that the authors term “blockbuster catastrophes.” Insurers adapt to these catastrophic risks by raising insurance rates, leading to lower loss ratios after the catastrophic event. There is a widespread event of unexpected catastrophes and blockbuster catastrophes that reduces total premiums earned in the state, reduces the total number writing insurance coverage in the state, and leads to the exit of firms from the state. Firms with low levels of homeowners’ premiums are most adversely affected by the catastrophes.     

Incentives and government relief for risk

Government relief is offered for a wide range of risks-natural disaster, economic dislocation, sickness, and injury. This article explores the effect of such relief on incentives and the allocation of risk in a model with private insurance. It is shown that government relief is inefficient, even when its level is less than the private insurance coverage that individuals would otherwise have purchased and even when private insurance coverage is incomplete due to problems of moral hazard.Harvard University and National Bureau of Economic Research (Cambridge, MA 02138; 617-495-4101). I am grateful for comments from Lucian Bebchuk, Martin Feldstein, John Parsons, Michael Rothschild, Steven Shavell, Lawrence Summers, and a referee, and for support from the John M. Olin Foundation.     

Arrow’s theorem of the deductible: Moral hazard and stop-loss in health insurance

The logic of Arrow’s theorem of the deductible, i.e. that it is optimal to focus insurance coverage on the states with largest expenditures, remains at work in a model with ex post moral hazard. The optimal insurance contract takes the form of a system of “implicit deductibles”, resulting in the same indemnities as a contract with full insurance above a variable deductible positively related to the elasticity of medical expenditures with respect to the insurance rate. In a model with a predefined ceiling on expenses, there is no reimbursement for expenses below the stop-loss amount. One motivation to have some insurance below the deductible arises if regular health care expenditures in a situation of standard health have a negative effect on the probability of getting into a state with large medical expenses.     

政府补助与民营企业研发投入

在关于政府研发补助政策对企业研发投入影响效应的争论背景下,本文通过分析第9次全国民营企业抽样调查数据,发现政府研发补助政策对中国民营企业研发投入具有激励效应,但这一效应受到企业决策者、企业资源禀赋结构以及企业环境等企业系统相关属性的影响。本文认为,为了进一步推动企业创新研发活动,政府需要继续改善市场环境,并在补助政策上向那些在企业决策和资源禀赋结构上更趋向于自主研发创新的民营中小企业倾斜。     

自然灾害与政治信任：基于汶川大地震的自然实验设计

在当代中国,自然灾害如何在短期内影响公众的政治信任,其作用机制如何？本文使用在汶川大地震发生前后收集的调查数据,试图通过自然实验设计来回答上述问题。本研究发现：在时间维度上,外生的自然灾害会在短时间内提升公众的政治信任;在结构上,地震对公众政治信任的边际增长效应呈现差序性特征,即对区县政府政治信任的正向作用最强,而对中央政府政治信任的强化作用最弱。在此过程中,国家主导的媒体宣传起到了关键的中介作用,即公众接收官方媒体信息的频率越高,其政治信任在短时间内提升的幅度越大。研究表明,灾后短期内的政府动员与鼓舞性的媒体议程设置是提升公众政治信任的重要影响因素,但从长远来看,切实加强政府的长效治理能力建设始终是巩固政治合法性的关键。     

Mitigating disaster losses through insurance

Losses from natural disasters have increased in recent years due to growth of population in hazard-prone areas and inadequate enforcement of building codes. This article first examines why homeowners have not voluntarily adopted cost-effective protective measures and have limited interest in purchasing insurance. It then proposes a disaster-management program which utilizes insurance coupled with well-enforced building codes to reduce future damage. Banks and financial institutions play a key role in this program by requiring inspections of homes as a condition for a mortgage. New forms of reinsurance coverage against catastrophic losses from natural disasters are necessary to protect insurers against potential insolvency from the next mega-disaster.     

The complex politics of catastrophe economics

The purpose of this essay is to explore the implications for public policy of the assumption that policy makers exhibit the same cognitive and perceptual problems as other citizens regarding catastrophic events. The key conclusion is that the same factors that cause citizens to behave inefficiently in preparing for and responding to disasters also will cause inefficiencies in policies concerning catastrophic events. Among the more important expected pathologies of disaster policies are: (1) a failure to balance benefits and costs at the margin for different types of disasters, due to cognitive pathologies such as availability and overconfidence; (2) a tendency for policy to underinvest in protection and overinvest in response; and (3) a skepticism for policies based on sound insurance principles for spreading costs and assessing claims.     

Indecisiveness aversion and preference for commitment

We present an axiomatic model of preferences over menus that is motivated by three assumptions. First, the decision maker is uncertain ex ante (i.e., at the time of choosing a menu) about her ex post (i.e., at the time of choosing an option within her chosen menu) preferences over options, and she anticipates that this subjective uncertainty will not resolve before the ex post stage. Second, she is averse to ex post indecisiveness (i.e., to having to choose between options that she cannot rank with certainty). Third, when evaluating a menu she discards options that are dominated (i.e., inferior to another option whatever her ex post preferences may be) and restricts attention to the undominated ones. Under these assumptions, the decision maker has a preference for commitment in the sense of preferring menus with fewer undominated alternatives. We derive a representation in which the decision maker’s uncertainty about her ex post preferences is captured by means of a subjective state space, which in turn determines which options are undominated in a given menu, and in which the decision maker fears, whenever indecisive, to choose an option that will turn out to be the worst (undominated) one according to the realization of her ex post preferences.     

Wagner’s law vs. Keynes’ hypothesis in very different countries (Armenia and Spain)

There is considerable controversy in the economic literature concerning whether particular government expenditures have an impact on economic growth. This study analyzes the macroeconomic magnitude of government expenditures in Armenia and Spain and evaluates whether there exists a causal relationship between government expenditures and economic growth, and vice versa (Keynes’ hypothesis and Wagner’s law). The study employs the VAR methodology to analyze annual data for the years 1996–2014. By utilizing Granger causality tests, the study reveals whether the government expenditures are a significant factor in economic growth in short-term perspective. Finally, IRF and FEVD tests are applied to estimate the effects of a change in particular government expenditures on GDP for twelve year time horizon. This study validates the hypothesis that, irrespective of size and nature of the economy (Armenia vs. Spain), some public expenditures (e.g. healthcare) positively contribute to the growth of the economy, while social protection in both countries is negatively related to GDP.     

Determinants of public support for tax and expenditure initiatives: An Oregon and Washington case study

This article examines the determinants of public support for state tax and expenditure initiatives in Washington and Oregon during the 1993 elections. Both states had initiatives on their November ballots dealing with taxes and expenditures—Measure 1 in Oregon, which would have introduced a state sales tax, and two initiatives in Washington (I-601 and I-602) concerning state government revenue and expenditure limitations. Using statewide mail and telephone surveys conducted among voting age residents of Oregon and Washington several weeks prior to the election, this study examines the determinants of public support for each of the initiatives. The determinants of support examined include various sociodemographic factors such as age cohort, gender, education, level of income, and occupational sector (public v. private); the level of informedness concerning each initiative; perceptions of self interest; and various political indicators, including partisan identification, ideology, degree of cynicism concerning state politics, and perceptions of state budget waste. Findings suggest similar patterns of support and opposition among citizens in both states, with perceptions of high state waste and political cynicism strongly associated with support for tax and expenditure limitation in Washington and opposition to the adoption of a sales tax in Oregon.     

Insurer ambiguity and market failure

A series of studies investigate the decision processes of actuaries, underwriters, and reinsurers in setting premiums for ambiguous and uncertain risks. Survey data on prices reveal that all three types of these insurance decision makers are risk averse and ambiguity averse. In addition, groups appear to be influenced in their premium-setting decisions by specific reference points such as expected loss and the concern with insolvency. This behavior is consistent with a growing analytical and empirical literature in economics and decision processes that investigates the role that uncertainty plays on managerial choices. Improved risk-assessment procedures and government involvement in providing protection against catastrophic losses may induce insurers to reduce premiums and broaden available coverage.This article is part of a larger effort supported by the National Science Foundation on The Role of Insurance, Compensation, Regulation, and Protective Behavior in Decision Making about Risk and Misfortune. We greatly appreciate the many helpful comments and suggestions by our colleagues on the project: Jon Baron, Colin Camerer, Neil Doherty, Jack Hershey, Eric Johnson, and Paul Kleindorfer. Support from NSF Grant #SES8809299 is gratefully acknowledged.     

Explaining the perceived justice of disaster relief policy: An empirical study based on the 2008 Wenchuan Earthquake in China

The Chinese government issued generous relief policies after the Wenchuan Earthquake. However, according to my survey, 20.32 per cent (n = 1,949) of the earthquake victim‐survivors felt that they were treated unfairly in receiving government assistance after the earthquake. In the present study, a perceived justice framework was established to explain the victim‐survivors’ perception of justice of the disaster relief policy in China and several hypotheses were developed. The hypotheses were tested empirically using household survey data of the Wenchuan Earthquake. The empirical study found that perceived justice, which is composed of three dimensions (distributive justice, interpersonal justice and informational justice), could directly assess the effect of the disaster relief policy. The results of the empirical study also demonstrated that the most important principle of the disaster relief policy was ‘need distribution’, which was also the most important factor of perceived justice. The study concluded that it is imperative to improve victim‐survivors’ feeling of fairness, policy information delivery and their expectations management when implementing a disaster relief policy.     

Poland: Social protection and the pension system during the transition

This paper argues that the brunt of the transition-induced increase in Polish social protection expenditures during 1989-93 has been borne by social insurance arrangements, particularly pensions, rather than by social assistance schemes targeted to the poor or more temporary social safety net schemes. This is largely due to ease of access to social insurance and its more attractive benefit structure. Much of the recent efforts to reform social protection arrangements had an ad hoc nature and was driven by the need to alleviate looming financial distress. A major policy challenge is to avoid further burdening the social insurance system, particularly pensions, by problems that should be addressed by basic income support and emergency assistance policies or by general transfers (e.g. family allowances). Current reform needs are illustrated by using the pension system as an example.     

Extension of social insurance coverage to informal economy workers in China: An administrative and institutional perspective

This article reviews administrative issues in the context of decentralized social protection in China. In particular, what are the main obstacles to expanding social insurance coverage for workers in the informal economy? Over the last two decades, China has achieved remarkable progress toward universal social protection when this target was set as a national policy priority. However, the social insurance enrolment of informal economy workers still lags significantly behind. This article reviews the application of the International Labour Organization’s definition of informality in the Chinese context and overviews existing pension and health insurances in China. This article discusses the impact of China’s inter‐governmental fiscal relations and decentralized social protection in the multilevel government system. The article highlights that under a system of decentralized managed social insurance many informal economy workers choose to opt out of the system because of low benefits and high compliance costs. This result in deficits in social insurance coverage amongst informal economy workers.     

Social risks and public pension in South Korea

This study investigated how traditional and new social risks have emerged in South Korea and how policies have coped with them, focusing on the public pension program. Using national statistics data and publicly published government reports, factors such as marital status, economic activity, and the insurance trend of the public pension by age and gender for the last decade were examined. Main results are as follows. Women's labor force participation has slightly increased; however, career discontinuity remains and new family risks have increased. Second, women's public pension coverage as a percentage of the employment rate has substantially increased, implying that old labor market risks have largely been reduced for female workers. Third, the public pension insured rate among male workers has decreased to a small degree, which implies that new labor market risks are increasing for male workers. Consequently, the gender gap in risk has been reduced; however, policies established to deal with new risks have introduced some gender effects     

Difficulties in making implicit government risk-bearing partnerships explicit

This article explains how lobbying pressure intensifies tax-transfer inefficiencies in disaster prevention and relief. The social-welfare tradeoff in the government's joint provision of safety regulation and disaster relief is distorted by disinformational lobbying activity by disaster-exposed households and by conflict between principles of horizontal and vertical equity. Horizontal equity presupposes that no group of taxpayers wants to transfer wealth ex ante to equally wealthy disaster-exposed parties. But vertical equity implies that, when disaster strikes, households that were previously able to hide the mitigability of their exposure to a ratable hazard can nevertheless extract sizable transfers from other taxpayers ex post.     

Macroeconomic and financing determinants of out of pocket payments in health care: Evidence from selected OECD countries

In this paper, we examine the impact of macroeconomic, as well public and private health insurance financing (PHI) factors on out of pocket (OOP) healthcare expenditures, by using fixed/random effects and dynamic panel data methodology to a dataset of 26 EU and OECD countries for a period lasting from 1995 to 2013. The existing empirical literature has focused on testing the hypothesis that several macroeconomic and health financing determinants have an effect on OOP healthcare expenditures. Nevertheless, the related articles have not well tested the hypothesis concerning the potential impact of PHI financing on OOP spending. We find that public and PHI financing have a significant countervailing effect on OOP spending. Moreover, we show that unemployment rate has a significant positive impact on OOP expenditures. Sensitivity tests with variation of specifications and samples show that our findings are robust. We argue that policy-makers should give serious consideration to PHI institution; our results indicate that there is an inverse effect on OOP spending. We suggest that our examined countries have to provide financial risk protection to their citizens against OOP payments, rather than only attending health budgetary retrenchments in order to adjust public finances.     

Moral hazard,risk seeking,and free riding

This article reports on a laboratory study of moral hazard in insurance markets. The experimental literature on the provision of public goods suggests that agents often sacrifice their narrowly defined self-interest for the good of the group. However, in those experiments, losses are deterministic. We find cooperation in experiments with stochastic losses to be much lower than in otherwise identical experiments with deterministic losses. We argue that the combination of risk seeking and free riding under stochastic returns to investment in loss control makes moral hazard particularly problematic for insurance markets.