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  3. American Economic Journal: Economic Policy
  4. November 2013
  5. The Economic and Policy Consequences of Catastrophes

The Economic and Policy Consequences of Catastrophes

  • Robert S. Pindyck
  • Neng Wang
American Economic Journal: Economic Policy
vol. 5, no. 4, November 2013
(pp. 306-39)
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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.

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

Additional Materials

JEL Classification

  • 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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