Public protection against misperceived risks: Insights from positive political economy

Citizens often misperceive the nature of risks they face and the impacts of alternative actions on those risks. For example, consumers may underestimate the probability of flood in their area, or they may underestimate the beneficial effect of passive restraints on the likelihood of automobile accident fatality. But recommendations that the government should mandate optimal purchases are often ignored by politicians or rejected in favor of direct public compensation. This paper uses some simple models of public choice to explain why other remedies are used; it explicitly accounts for the fact that the same ignorant consumer whose behavior would have to be constrained are the ones whom the politician must please. In a simple world-of-equals model, such consumer-voters may well favor the alternative devices of implicit mutual insurance and conditional payment. When voters are heterogeneous, the political equilibrium (if one exists) is shown to depend upon the distribution of voters by perceived net benefit of public action and of taxes. Public action may be least feasible exactly when it would do the most good.     

What Are the Federal Home Loan Banks Up To? Emerging Views of Purpose among Institutional Leadership

The Federal Home Loan Bank System has come under sharp criticism in recent years, and the question has been raised as to whether it still has a public purpose. In this article, we ask what leaders in the Federal Home Loan Banks view their institutions' purpose to be in light of legislative changes to their mandates in 1989 and 1999. Based on interviews with FHLB executive managers and board members, we identify three clearly distinguishable views of these institutions' mission: housing finance, support for the viability of community financial institutions, and support for and community development. We go on to identify some of the implications of these distinctive views for the behavior of the FHLBs and for their governance structures.