Welfare Costs of Catastrophes: Lost Consumption and Lost Lives
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w26068.pdf
Description
Submitted version
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317.58 KB
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f3dfe473a9a8e787ef9cde53ed11ec7b
Author(s)
Martin, Ian WR
Pindyck, Robert S
Date Issued
2021
Journal
Economic Journal
Publisher
Oxford University Press (OUP)
Version
Original manuscript
Abstract
Abstract
Most of the literature on the economics of catastrophes assumes that such events cause a reduction in the stream of consumption, as opposed to widespread fatalities. Here we show how to incorporate death in a model of catastrophe avoidance, and how a catastrophic loss of life can be expressed as a welfare-equivalent drop in consumption. We examine how potential fatalities affect the policy interdependence of catastrophic events and ‘willingness to pay’ (WTP) to avoid them. Using estimates of the ‘value of a statistical life’ (VSL), we find the WTP to avoid major pandemics, and show that it is large (10% or more of annual consumption) and partly driven by the risk of macroeconomic contractions. Likewise, the risk of pandemics significantly increases the WTP to reduce consumption risk. Our work links the VSL and consumption disaster literatures.
Most of the literature on the economics of catastrophes assumes that such events cause a reduction in the stream of consumption, as opposed to widespread fatalities. Here we show how to incorporate death in a model of catastrophe avoidance, and how a catastrophic loss of life can be expressed as a welfare-equivalent drop in consumption. We examine how potential fatalities affect the policy interdependence of catastrophic events and ‘willingness to pay’ (WTP) to avoid them. Using estimates of the ‘value of a statistical life’ (VSL), we find the WTP to avoid major pandemics, and show that it is large (10% or more of annual consumption) and partly driven by the risk of macroeconomic contractions. Likewise, the risk of pandemics significantly increases the WTP to reduce consumption risk. Our work links the VSL and consumption disaster literatures.
MIT Department
Sloan School of Management
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DOI of Published Version
10.1093/EJ/UEAA099
https://doi.org/10.1093/EJ/UEAA099
