EVERYONE MAY BENEFIT FROM SUBSIDISING ENTRY TO RISKY OCCUPATIONS

This paper shows that in the presence of costly state verification, di rectly or indirectly subsidising entry to risky occupations may benefi t 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 observin g outcomes. The explanation is that through its influence on equilibri um price, feasible fiscal policy can shift the return distribution so as to create collective insurance more cheaply than is possible throug h private contracting with its requirement of costly auditing. Amongst applications is a case for a loss-making state bank offering high int erest-rate loans. (C) 1997 Elsevier Science S.A.