Economic Analysis of Centralization and Decentralization with Risk Management

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We have investigated the positive and normative aspects of risk management policy under centralized and decentralized system. We also considered risk management policy where risk occurs endogenously in a growth model setting. By incorporating macro fiscal and monetary policy, social security reform, and fiscal decentralization into the analytical framework, we have clarified the desirable properties of risk management. We investigated the current redistribution policy, the social security structure, and regional economic policy of major developed countries and derived interesting analytical results based on the actual policy issues of these countries. We have used the politico-economic approach to this topic.It is well recognized that although the disexternalities of pubic bads such as pollutants due to economic growth do not necessarily enhance welfare, the abatement behavior may offset such disexternalities. Moreover, if the agent evaluates growth much and conceives no need for conducting abatement, she gains from growth much. Thus, a natural conjecture is that growth normally enhances welfare especially for the poor agent. By explicitly incorporating the optimizing abatement behavior, we showed that the conjecture is not necessarily valid. Namely, a decrease in wealth differentials may not improve the quantity of environment, which could hurt even the poor, who faces a corner solution. We also showed that the worldwide economic growth would hurt the poor country if it deteriorates environment much, and the abatement technology is very inefficient, and the number of poor countries is large.