Charity Hazard And Equity-Efficiency Trade-off In Catastrophe Insurance

The last decades have witnessed the huge worldwide increasing frequency and intensity of natural disasters. From the worst flooding along Yangzi River in 1998 in a century, to the snow disaster in the south of China in the beginning of 2008, to 5.12 Wenchuan earthquake in the same year, and to the recent months'especially big drought in the south west of China, these raged natural disasters have brought huge economic loss as well as mental injury to Chinese people. Compared to the huge loss, however, the catastrophe insurance market in some countries is very small. In face of the potential risks, people are always ready to receive governmental aid or charity donation for free without purchasing insurance against natural disasters.Due to the free financial assistance and charity donation, people will solely rely on governmental support. Governmental relief reduces the demand for insurance cover and motivation for mitigation measures. As a result, charity hazard emerges, which increase the economic burden of government. In the third chapter, we analyze charity hazard systematically. By using a game model, we illustrate how the ex post governmental assistance influence people's investing will in mitigation measures; and then we use state-space graph to analyze how the level of financial relief reduce people's demand for insurance. We find that the individual is better off by solely relying on governmental support in a certain level of governmental aid. The higher level of governmental aid, the graver the charity hazard. We also propose some suggestions for governmental relief mechanism.Because of the existence of charity hazard, how to reduce it? In the fourth chapter, 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. That is to tax insurance contracts in a low-risk area and subsidize insurance contracts in a high-risk area. The model illustrates how targeted tax cuts on insurance contracts can improve the incentives to prevention while compensating individuals with high prevention costs. Furthermore, if the government gives some subsidies to those who live in high risky areas for mitigation program, a better Pareto improvement has come into being.