The Economic and Policy Consequences of Catastrophes
Name
SSRN-id1474034.pdf
Size
210.35 KB
Format
Adobe PDF
Checksum (MD5)
63a4be3ad7fb5ec39bb549ebb0256c7c
Author(s)
Pindyck, Robert S.
Wang, Neng
Date Issued
September 2009
Publisher
Cambridge, MA; Alfred P. Sloan School of Management, Massachusetts Institute of Technology
Series/Report no.
MIT Sloan School of Management Working Paper;4751-09
Abstract
What is the likelihood that the U.S. will experience a devastating catastrophic event over the next few decades – something that would substantially reduce the capital stock, GDP and wealth? What does the possibility of such an event imply for the behavior of economic variables such as investment, interest rates, and equity prices? And how much should society be willing to pay to reduce the probability or likely impact of such an event? We address these questions using a general equilibrium model that describes production, capital accumulation, and household preferences, and includes as an integral part the possible arrival of catastrophic shocks. Calibrating the model to average values of economic and financial variables yields estimates of the implied expected mean arrival rate and impact distribution of catastrophic shocks. We also use the model to calculate the tax on consumption society would accept to reduce the probability or impact of a shock.
Subjects
catastrophes
rare events
economic uncertainty
consumption tax
national security
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