Natural Disaster Insurance and the Equity-Efficiency Trade-Off

Abstract
This article investigates the role of private insurance in the prevention and mitigation of natural disasters. We characterize the equity-efficiency trade-off faced by the policymakers under imperfect information about individual prevention costs. It is shown that a competitive insurance market with actuarial rate making and compensatory tax-subsidy transfers is likely to dominate regulated uniform insurance pricing rules or state-funded assistance schemes. The model illustrates how targeted tax cuts on insurance contracts can improve the incentives to prevention while compensating individuals with high prevention costs. The article highlights the complementarity between individual incentives through tax cuts and collective incentives through grants to the local jurisdictions where risk management plans are enforced.
Volume
75: 1
Page
17-38
Year
2008
Publications
Journal of Risk and Insurance, The
Prizes
American Risk and Insurance Association Prize
Authors
Pierre Picard

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