Governmental Disaster Assistance and Moral Hazard: Focusing on the Slight Damage Assistance Program for the Pohang Earthquake Victims

Abstract

This study shows that an inappropriately designed disaster assistance program may provoke disaster victims to commit fraud, resulting in moral hazard. We analyzed the case of the Pohang earthquake in 2017 using three data sources: stakeholder interviews, newspaper articles, and posts on online community boards. Although its magnitude was not catastrophic (M 5.4), the earthquake had a significant impact on local residents who were not familiar with managing earthquakes. The Korean government distributed individual disaster assistance grants. However, the lack of a monitoring process resulted in negative consequences to some earthquake victims who received the slight damage assistance grants. These negative results imply a moral hazard from the principal-agent perspective. We examined whether the slight damage assistance program in Korea should be maintained, despite its negative consequences.