Colloquium Natural Hazards. Liability and compensation for natural disasters: A Law and Economics perspective

Transcription

1 Colloquium Natural Hazards Liability and compensation for natural disasters: A Law and Economics perspective Louis Visscher Rotterdam Institute of Law and Economics (RILE) Erasmus University Rotterdam visscher@law.eur.nl 26 October 2017

2 Structure of presentation What is Law and Economics? Various measures regarding natural disasters: Ex ante: precaution Ex post: Recovery: compensation and reconstruction a while after the disaster Relief: measures directly after the disaster Problem: too much ex post; too little ex ante. Why? Compensation methods compared: Liability Government Insurance Summary and conclusion 1/12

3 What is Law and Economics? Economic analysis of law : Law as instrument to provide incentives Goal: maximize social welfare Example: tort law Lawyers: ex post perspective; who bears the losses? L&E: ex ante: care incentives to avoid losses Optimal care not all losses are avoided The non-avoided losses have to be spread Prevention and loss spreading as goals. 2/12

4 Measures regarding natural disasters (1) Ex ante versus ex post measures 1. Ex ante measures: precautions Prevent disaster; reduce probability of disaster; mitigate seriousness of the event; mitigate seriousness of the consequences of the event Zeckhauser: Most catastrophes are produced jointly by nature and humans. Nature provides the earthquake; humans build the inappropriate structures, and crowd them together so that fires are disastrous ( ). The adverse consequences of catastrophes are increased when decision makers are given insufficient incentives to promote safety, or when institutional arrangements are such that our compensation or amelioration efforts are far out of line. 3/12

5 Measures regarding natural disasters (2) Ex ante versus ex post measures 1. Ex ante measures: precautions Governments and individuals can take precautions. When government? Large scale: budget; economies of scale; information; public goods Care measures which cost less than the losses they avoid are desirable induce parties to take these measures! 4/12

6 Measures regarding natural disasters (3) Ex ante versus ex post measures 2. Ex post measures Traditional L&E literature focused on compensation. Problem: dilution of ex ante incentives Catastrophic response to catastrophic risks (Richard Epstein) Difference between structural and ad hoc funds More recent literature distinguishes two types of ex post measures: 5/12

7 Measures regarding natural disasters (4) Ex ante versus ex post measures 2. Ex post measures a) Recovery Compensation (see above) Reconstruction (public services; infrastructure). Care incentives for victims intact; care incentives for governments not intact (reasons: next slide) b) Relief Directly after disaster; to limit losses Often government (public good; economies of scale; funding; legal reasons) Also: providing security 6/12

8 Measures regarding natural disasters (5) Ex ante versus ex post measures They are substitutes, but ex post is overused at the expense of ex ante (see Katrina and Irene). Why? Short time horizon of politicians: certain costs now versus possible benefits in the (far) future; If successful, benefits of care are invisible, but costs are not; Hold-up : politicians cannot refuse ex post compensation once victims are visible, even though it causes adverse ex ante effects. SO: ex post measures reduce ex ante incentives. This is undesirable! 7/12

9 Compensation mechanisms (1) Non-avoided losses should be optimally compensated/spread Ex post compensation does spread losses. But: It reduces ex ante precautions (see previous slides) It reduces incentive to buy first party insurance, while insurance has advantages: Solves hold-up problem Ex-ante incentives still possible via insurer What are L&E requirements for good compensation mechanism? Avoid cross-subsidization: bear costs of own protection; no over-compensation Retain ex ante care incentives 8/12

10 Compensation mechanisms (2) Possible mechanisms 1. Civil liability (tort law) Limited role with natural disasters, but: Holding government liable for not taking enough care (e.g. Water authority Brabant) Liability for industrial accidents as result of natural disaster (e.g. Fukushima 2011) More prevention than compensation (too expensive; problems of private enforcement) 2. Ex post governmental compensation Advantage: spreading over population and future generations 9/12 Disadvantages: see above

11 Compensation mechanisms (3) Possible mechanisms 3. First party insurance Advantages: risk segregation; avoid crosssubsidization; preserve ex ante care incentives However, there are some problems: Underestimation of low probability events no demand People don t like certain loss no demand Uninsurability? (limited data; insolvency risk) no supply Unaffordable for low income victims 10/12

12 Compensation mechanisms (3) Possible mechanisms 3. First party insurance Possible solutions: Insurance vouchers/subsidized premiums Re-insurance, potentially government as reinsurer of last resort Compulsory insurance France 1982 (connected to house insurance) Belgium 2005 (connected to fire insurance) Netherlands: 1950s uninsurable ; since late 1990s voluntarily insurable (but only few are insured) still ex post comp. 11/12

13 Summary and conclusions Distinction between ex ante and ex post measures Efficient precaution is desirable Ex post measures dilute ex ante incentives Ex post recovery measures are problematic (compensation and reconstruction) Ex post relief does have social value. Is mostly a government task Non-avoided losses should be optimally spread. Liability has limited role; ex post governmental compensation is problematic; insurance preferable Voluntary insurance does not work mandatory Some countries have it; others still rely too much on ex post compensation by government 12/12

14 Colloquium Natural Hazards Liability and compensation for natural disasters: A Law and Economics perspective Louis Visscher Rotterdam Institute of Law and Economics (RILE) Erasmus University Rotterdam visscher@law.eur.nl 26 October 2017