Working Papers in Economics,
University of Gothenburg, Department of Economics

Abstract: Much psychological evidence suggests that people’s risk-perceptions are biased. This paper assumes that public policy should intrinsically be concerned with people’s expected welfare, rather than their preferences, which sometimes implies a degree of paternalism. Still, expected welfare depends on both objective and subjective risks. The latter are important through mental suffering associated with the risk, and through secondbest considerations in decentralized markets where people make their own choices between risky alternatives. Optimality rules for both public provision of risk-reducing investments, and for provision of (costly) information to reduce people’s risk-perception bias, are presented.

Keywords: Subjective risk; risk management; risk regulation; risk-perception; information provision; cost-benefit analysis; paternalism

JEL-codes: D81

18 pages, March 28, 2003

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