Tag Archives: government

The Government Will Foot the Bill!

This post was initially written in French https://freakonometrics.hypotheses.org/87308

Who has never heard this phrase? It comes back almost automatically as soon as a collective risk becomes visible. After a flood, after a wildfire, after a storm, after a drought that lasts too long, you hear, in passing conversation or in an op ed, a formula that sounds like both an obvious truth and a conclusion. That familiar The Government Will Foot the Bill, which I have kept as the title of this post. Sometimes it appears in a gentler form, The government must take responsibility. Sometimes in a harsher after the fact form, They have to pay. In every case, the phrase says something about our relationship to the collective, to solidarity, to justice, and to public money. It also says something about the way we turn a disaster into a political problem.

I wanted to write a post that starts from this formula, not to decide whether the claim is true or false, but to understand what it means, what it hides, and what it forces us to make explicit. The expression has a particular power. It seems simple, but it compresses very different ideas, sometimes contradictory. It can express an expectation of protection. It can express anger. It can express a demand for justice. It can express a vague belief in an unlimited common pot (that famous magic money, as we call it in French) to reuse the well known phrase. It can also express a feeling of individual powerlessness. And depending on the country, the history of institutions, and lived experience of risk, the word government does not evoke the same thing. Still, it is worth noting that this debate about who pays often starts too late, because trying to clarify the government will foot the bill is already turning the phrase into a programme, fiscal and moral.

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C’est l’État qui paiera!

Qui n’a jamais entendu cette phrase ? Elle revient mécaniquement dès qu’un risque collectif devient visible. Après une crue, après un feu de forêt, après une tempête, après une sécheresse qui dure trop longtemps, on entend, au détour d’une discussion ou d’une tribune, une formule qui sonne comme une évidence et comme une conclusion. Ce fameux “C’est l’État qui paiera” que j’ai gardé comme titre pour mon billet. Parfois on l’entend sous une forme plus douce “L’État doit prendre ses responsabilités“. Parfois sous une forme plus sèche, ex-post, “Il faut qu’ils paient“. Dans tous les cas, la phrase dit quelque chose de notre rapport au collectif, à la solidarité, à la justice, et à l’argent public. Elle dit aussi quelque chose de notre façon de transformer une catastrophe en problème politique. Je voulais écrire un billet qui part de cette formule, non pas pour savoir si l’affirmation est vraie ou fausse, mais plutôt pour essayer de comprendre ce qu’elle veut dire, ce qu’elle cache, et ce qu’elle oblige à préciser. Car l’expression a un pouvoir particulier. Elle paraît simple, mais elle condense des idées très différentes, parfois contradictoires. Elle peut exprimer une attente de protection. Elle peut exprimer une colère. Elle peut exprimer une demande de justice. Elle peut exprimer une croyance vague dans une caisse commune illimitée (oui, le fameux “argent magique” pour reprendre l’expression bien connue). Elle peut aussi exprimer un constat d’impuissance individuelle. Et selon les pays, l’histoire des institutions et l’expérience du risque, le mot État n’évoque pas la même chose. Maintenant, notons quand même que ce débat sur qui paie commence souvent trop tard, parce que chercher à clarifier c’est l’État qui paiera, c’est transformer la phrase un programme de gouvernement, un programme fiscal, et un programme moral.
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Talk with CCR and chaire PARI, in Paris, on government intervention and welfare

This afternoon, I will give a brief talk on welfare and optimal policies for government intervention, at CCR, in Paris. I have some slides to present. The presentation is based on a papers we wrote a few years ago, Government Intervention in Catastrophe Insurance Markets: A Reinforcement Learning Approach

This paper designs a sequential repeated game of a micro-founded society with three types of agents: individuals, insurers, and a government. Nascent to economics literature, we use Reinforcement Learning (RL), closely related to multi-armed bandit problems, to learn the welfare impact of a set of proposed policy interventions per $1 spent on them. The paper rigorously discusses the desirability of the proposed interventions by comparing them against each other on a case-by-case basis. The paper provides a framework for algorithmic policy evaluation using calibrated theoretical models which can assist in feasibility studies.

In this paper, we used the concept of Marginal Value of Public Funds, or “MVPF, introduced in 2020 by Amy Finkelstein, Nathaniel Hendren and Ben Sprung-Keyser, in “Welfare Analysis Meets Causal Inference“, and “A Unified Welfare Analysis of Government Policies“. See some slides online, or the website https://policyinsights.org/.

The role of government versus private sector provision of insurance

A short paper The role of government versus private sector provision of insurance has just been published in the Journal of Risk and Insurance.

Insurance markets are important for managing risk and promoting economic stability, since they play a key role in mitigating financial losses from unpredictable events such as natural disasters, cyberattacks, and health crises. However, these markets often face challenges, including market failures, information asymmetries, and correlated risks that can destabilize private insurers. In response, governments frequently intervene in insurance markets, either by providing insurance directly or by acting as a reinsurer of last resort. The interaction between government and private sector provision of insurance raises interesting and important questions about the appropriate role of each player in ensuring market efficiency and protecting individuals and businesses from catastrophic risks.

Natural Catastrophe Insurance: How Should Governments Intervene?

The paper, written with Benoit le Maux, “Natural Catastrophe Insurance: How Should Government Intervene?” should appear soon in the Journal of Public Economics.

This paper develops a theoretical framework for analyzing the decision to provide or buy insurance against the risk of natural catastrophes. In contrast to conventional models of insurance, the insurer has a non-zero probability of insolvency which depends on the distribution of the risks, the premium rate, and the amount of capital in the company. When the insurer is insolvent, each loss reduces the indemnity available to the victims, thus generating negative pecuniary externalities. Our model shows that government-provided insurance will be more attractive in terms of expected utility, as it allows these negative pecuniary externalities to be spread equally among policyholders. However, when heterogeneous risks are introduced, a government program may be less attractive in safer areas, which could yield inefficiency if insurance ratings are not chosen appropriately.

The paper is still available on the http://papers.ssrn.com/1832624 website.

Natural Catastrophe Insurance: How Should the Government Intervene?

An updated version of the joint paper with Benoit Le Maux is online on http://papers.ssrn.com/.

The present paper develops a new theoretical framework for analyzing the decision to provide or buy insurance against the risk of natural catastrophes. In contrast with conventional models of insurance, the insurer has a non-zero probability of insolvency that depends on the distribution of the risks, the premium rate, and the amount of capital in the company. Among several results, we show that risk-averse policyholders will accept to pay higher rates for a government-provided insurance with unlimited guarantee. However, depending on the correlation between and within the regional risks, a government program can be more attractive to high-correlation than to low correlation areas, which may lead to inefficiencies if the insurance ratings are not appropriately chosen.