Dr. Emilio Osambela:
"Preventing Controversial Catastrophes"

Federal Reserve DC

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 disasterreducing
policy jumps in periods of disasters, it may be optimal for policy-makers to propose disaster-reducing policies after disasters occur. In some scenarios constituencies may even demand policies oriented to increase disaster risk if these policies introduce speculative opportunities.