Ex Post Versus Ex Ante Optimal Policies for Risky Activities

This paper analyzes government policy when random shocks affect particular industries, occupations or regions. Workers can freely choose and industry or occupation ex ante, and can relocate at a cost, once uncertainty is resolved. The policy instruments available are per capita taxes and subsidies. These are chosen either to maximize ex post utilitarian aggregate welfare, or to maximize ex ante expected utility of a representative worker. Optimal policies range from complete equalization of net incomes across workers to no equalizing transfers.