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Everyone may benefit from subsidsing entry to risky occupations

By David de Meza and J. Black

Abstract

This paper shows that in the presence of costly state verification, directly or indirectly subsidising entry to risky occupations may benefit everyone. The result holds even in the presence of private insurance. Indeed, it may be desirable to prohibit private insurance in favour of subsidies to hazardous activities. These findings do not depend on the government having an advantage over the private sector in observing outcomes. The explanation is that through its influence on equilibrium price, feasible fiscal policy can shift the return distribution so as to create collective insurance more cheaply than is possible through private contracting with its requirement of costly auditing. Amongst applications is a case for a loss-making state bank offering high interest-rate loans

Topics: HB Economic Theory
Publisher: Elsevier
Year: 1997
DOI identifier: 10.1016/S0047-2727(97)00048-0
OAI identifier: oai:eprints.lse.ac.uk:35862
Provided by: LSE Research Online
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