This paper analyzes the risk of the vicious cycle created by expectations of individuals that the federal government will always come to their rescue in the aftermath of a disaster, and more so, that they can always expect at least as much relief as was given to victims of previous catastrophes. As a result, elected officials might feel that they have no alternative than to provide even more relief the next time if they want to benefit politically from their actions… This cycle is happening in the United States.

While previous work has been done on the disincentive that relief creates for individuals to purchase proper insurance coverage (Buchanan, 1975; Coate, 1995), here we propose a more systematic political economic analysis of this escalating need for ever more relief and its impact on government revenues. We show that a government will benefit in the long run from simply capping relief payouts. However, this policy will prove more challenging to implement the longer one waits and eventually, it might be impossible politically for any new administration to do it. We show that the dominating strategy to limit government liability is to actually use two policy tools simultaneously: a publicly-known cap on relief payouts combined with the right level of public insurance subsidies.