Compensating the Victims of 9/11
Dr. Martin F. Grace makes some very insightful comments concerning Rand's just released study entitled "Compensating the Victims of 9/11". Dr. Grace links to Figure 2 of the Rand study, which shows how compensation is distributed according to who (e.g., charity, government, private insurers) paid what to whom (e.g., civilians and emergency responders killed or seriously injured during the attacks on the twin towers), and he notes that charity picked up 7% of the tab, private insurers paid 51% of total losses, and the government picked up the remainder.
An obvious public policy implication is whether ex post victim compensation by charity and government may "crowd out" private insurance. As Dr. Grace notes, "public policy should be designed to encourage people to have more insurance rather than rely upon prospective government payments." I made similar points two months ago concerning the effect of public disaster relief on the risk management incentives of firms and individuals. The prospect of public disaster relief creates a serious moral hazard problem by reducing consumers' demand for private insurance, which in turn incentivizes them to underinvest in loss prevention and mitigation.