6. Interregional Risk Sharing and Fiscal System for Natural Disasters

Income in a disaster-stricken area after a natural disaster decreases with the abandonment of capital stock and other factors, but income in non-disaster-stricken areas may increase because of a concentration of halted production. Similarly, income in disaster-stricken areas increases with investment in disaster prevention, recovery, and reconstruction to cope with natural disasters, but it is uncertain whether income increases or decreases in non-disaster-stricken areas. Thus, not only natural disasters but also investment in disaster prevention, recovery, and reconstruction has asymmetric spillover effects across regions. Based on these effects, this chapter theoretically examines interregional risk sharing through public insurance as well as investment in disaster prevention, recovery, and reconstruction. The results show that public insurance encourages investment in disaster prevention, recovery, and reconstruction. Using the Great East Japan Earthquake as a case study, we conduct a computable general equilibrium analysis to quantitatively demonstrate the asymmetric spillover effects of the earthquake and reconstruction investment, and clarify the extent to which public insurance improves welfare.