Journal of Risk and Uncertainty

, Volume 49, Issue 3, pp 213–234 | Cite as

A general rationale for a governmental role in the relief of large risks

  • Steven ShavellEmail author


The government often provides relief against large risks, such as disasters. A simple, general rationale for this role of government is considered here that applies even when private contracting to share risks is not subject to market imperfections. Specifically, the optimal private sharing of large risks will not result in complete coverage against them. Hence, when such risks eventuate, the marginal utility to individuals of government relief may exceed the marginal value of public goods. Consequently, social welfare may be raised if the government reduces public goods expenditures and directs these freed resources toward individuals who have suffered losses.


Government relief Large risks Insurance 

JEL Classifications

D6 D8 K2 



I thank Peter Diamond, Georges Dionne, Kenneth Froot, Louis Kaplow, and A. Mitchell Polinsky for comments, Michael Belinsky and Jonathan Borowsky for research assistance, and the John M. Olin Center for Law, Economics, and Business at Harvard University for research support.


  1. Arrow, K. J., & Lind, R. C. (1970). Uncertainty and the evaluation of public investment decisions. American Economic Review, 60(3), 364–378.Google Scholar
  2. Cook, P., & Graham, D. (1977). The demand for insurance and protection: The case of irreplaceable commodities. Quarterly Journal of Economics, 99(1), 143–156.Google Scholar
  3. Cummins, J. D. (2006). Should the government provide insurance for catastrophes? Federal Reserve Bank of St. Louis Review, 88(4), 337–379.Google Scholar
  4. Dionne, G., Doherty, N., & Fombaron, N. (2000). Adverse selection in insurance markets. In G. Dionne (Ed.), Handbook of insurance (Chapter 7). Boston: Kluwer.CrossRefGoogle Scholar
  5. Federal Emergency Management Agency. (2002). National Flood Insurance Program. Program description.
  6. Froot, K. (Ed.). (1999). The financing of catastrophe risk. Chicago: University of Chicago Press.Google Scholar
  7. Froot, K. A. (2001). The market for catastrophe risk: A clinical examination. Journal of Financial Economics, 60(2–3), 529–571.CrossRefGoogle Scholar
  8. Jaffee, D. M., & Russell, T. (1997). Catastrophe insurance, capital markets, and uninsurable risks. Journal of Risk and Insurance, 64(2), 205–230.CrossRefGoogle Scholar
  9. Kaplow, L. (1991). Incentives and government relief for risk. Journal of Risk and Uncertainty, 4(2), 167–175.CrossRefGoogle Scholar
  10. Kunreuther, H., Ginsburg, R., Miller, L., Sagi, P., Slovic, P., Borkin, B., & Katz, N. (1978). Disaster insurance protection. New York: Wiley.Google Scholar
  11. Moss, D. A. (1999). Courting disaster? The transformation of federal disaster policy since 1803. In K. Froot (Ed.), The financing of catastrophe risk (Chapter 8). Chicago: University of Chicago Press.Google Scholar
  12. Priest, G. L. (1996). The government, the market, and the problem of catastrophic loss. Journal of Risk and Uncertainty, 12(2–3), 219–237.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media New York 2014

Authors and Affiliations

  1. 1.Samuel R. Rosenthal Professor of Law and EconomicsHarvard Law SchoolCambridgeUSA

Personalised recommendations