Report

Missing Markets: Why Markets that Can Reduce Risks are Missing and What Can be Done About It

Jason Furman

INTRODUCTION

Markets are the central institution of the economy, allowing people to buy and sell goods and services in a manner that potentially makes everyone better off. Markets can also play a role in reducing the risks that individuals face by allowing them to purchase insurance such as health insurance, life insurance, or property insurance. Through insurance markets, households and communities can reduce the risks they face by pooling them, or sell these risks to entities that are better able to bear them.

But in certain situations, markets that could potentially help to mitigate or reduce the risks faced by society and individuals are underutilized or even nonexistent, leaving households to face some of the largest risks without any protection. For example, while most Americans want to own a home, such a purchase comes inextricably linked to taking a major financial gamble on the value of the house. New ways of financing houses or insuring against lost property values could reduce this risk. Another major risk families face is outliving their assets in retirement and then being forced to have a dramatically lower standard of living in the final years of life—a problem that can in principle be addressed by the development of lifetime income products aimed at providing a long-term, reliable stream of income for retirees.

The absence of markets to address societal risks can exacerbate these problems as well. For example, terrorist attacks, hurricanes, and other catastrophic events create major financial risks for individuals, businesses, local governments, and the economy as a whole. In principle, these risks should be insurable, but today many or most of them are not. Similarly, many communities face substantial risk as a result of shocks to local tax revenue, which can send them into a downward spiral of reduced revenue, spending cuts, outward migration, and further reduced revenue. Without adequate protection, the entire community becomes vulnerable to economic hardship.

The ways in which markets can but often do not help people and communities have been a thread running through many of the discussion papers released by The Hamilton Project. These papers identify a range of missing markets for both societal and individual risk, highlighting three specific reasons for the absence of these markets and proposing solutions to enable private markets to flourish or public markets to play a role.

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View Presentation »

Author

Jason Furman

Senior Fellow - Peterson Institute for International Economics

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