Government Relief for Risk Associated with Government Action
A significant source of risk arises from uncertainty concerning future
government policy. Government action - - tax reform, deregulation, judicial
decisions, budgetary shifts - - produces gains and losses for those who
invested under preexisting rules. The effects of government relief - -
compensation, grandfathering, phase-ins - - on ex ante incentives and risk
bearing are examined in a model in which private insurance is taken into
account. It is demonstrated that government relief is inefficient, even when
private insurance is subject to moral hazard, because relief shields
individuals from some of the effects of their actions.
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