Geoscience Reference
In-Depth Information
The Geography of Risk and Preferences for Fiscal Structures
Unpacking the geography of risks and insurance demands attention to two fac-
tors: regional economic specialization and the scope of labor mobility across
regions. The former, I will argue, works to exacerbate geographical differences
in insurance demands. The latter works to mute these differences by fostering
levels of risk sharing between regions. In this section, I analyze how the geogra-
phy of risks and demands for insurance affect the politics of selection of fiscal
structures.
Literature in political economy repeatedly identifies risks, that is the possi-
bility of a future income loss, as a key factor in driving people's redistributive
preferences (Atkinson
1995
,
1999
; Moene andWallerstein
2001
;Varian
1980
).
This being the case, risk and risk aversion, as well as the territorial distribution
of risk, becomes a primary mechanism for other aspects of economic geography
to condition the selection of fiscal institutions.
The concentration of different types of economic activities across territories
is particularly relevant. This applies both to the existence of a division of labor
in the world economy between countries, and to the concentration of different
types of economic activity across the regions of any given union (Cai and Treis-
man
2005
; Krugman 1991; Venables
2001
). There are examples of this sort of
process throughout economic history. As industrialization and deruralization
develop, territorialization of different economic activities intensifies. Manu-
facturing industries are concentrated where there is easy access to transport,
whereas extraction industries (fisheries, coal, etc.) are located close to natural
resources, including fertile ground. Most countries have three or four areas of
economic development that attract large masses of workers, thereby altering
their social and economic geography.
In this context, it is possible to argue that workers vary in their ability
to move across industries and regions. Their mobility is dependent on the fit
between their abilities and the skills demanded by different sectors. For exam-
ple, the oversupply of rural workers in nineteenth century Europe was largely
absorbed by emerging manufacturing industries in Europe and beyond. His-
torically, masses of unskilled workers would be responsive to new employment
opportunities in different territories, or, in times of crisis, to the supply of
social protection in different localities. In contrast, when there is no fit between
workers' skills and alternative opportunities, mobility is not an option and,
arguably, employees become more aware of the possibility of a future income
loss. So the trade-off between geographical mobility and the level of specializa-
tion of the economy (Boix
2003
) speaks directly to the levels of risk aversion
among workers.
To capture these processes I broaden the model of individual preferences to
include an insurance element. This captures the importance of differences across
regions in terms of economic specialization. The key analytical result is that
the demand for redistribution increases with risk aversion, which reflects the
