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American Economic Journal: Economic Policy: Vol. 5 No. 4 (November 2013)

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The Economic and Policy Consequences of Catastrophes

Article Citation

Pindyck, Robert S., and Neng Wang. 2013. "The Economic and Policy Consequences of Catastrophes." American Economic Journal: Economic Policy, 5(4): 306-39.

DOI: 10.1257/pol.5.4.306

Abstract

How likely is a catastrophic event that would substantially reduce the capital stock, GDP, and wealth? How much should society be willing to pay to reduce the probability or impact of a catastrophe? We answer these questions and provide a framework for policy analysis using a general equilibrium model of production, capital accumulation, and household preferences. Calibrating the model to economic and financial data, we estimate the mean arrival rate of shocks and their size distribution, the tax on consumption society would accept to limit the maximum size of a catastrophic shock, and the cost to insure against its impact.

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Download Data Set (301.86 KB) | Online Appendix (49.76 KB) | Author Disclosure Statement(s) (86.35 KB)

Authors

Pindyck, Robert S. (MIT)
Wang, Neng (Columbia U)

JEL Classifications

D81: Criteria for Decision-Making under Risk and Uncertainty
E22: Capital; Investment; Capacity
E23: Macroeconomics: Production
E32: Business Fluctuations; Cycles
G22: Insurance; Insurance Companies; Actuarial Studies
H25: Business Taxes and Subsidies including sales and value-added (VAT)
Q54: Climate; Natural Disasters; Global Warming

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