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Board of Governors of the Federal Reserve System (U.S.)
Finance and Economics Discussion Series
Preventing Controversial Catastrophes
Steven D. Baker
Burton Hollifield
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.


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Steven D. Baker & Burton Hollifield & Emilio Osambela, Preventing Controversial Catastrophes, Board of Governors of the Federal Reserve System (U.S.), Finance and Economics Discussion Series 2018-052, 19 Jul 2018.
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Keywords: Crowding out ; Disagreement ; Disaster risk ; Government policy ; Willingness to pay
DOI: 10.17016/FEDS.2018.052
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