Working Paper: NBER ID: w26068
Authors: Ian W.R. Martin; Robert S. Pindyck
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 wealth or 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 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.
Keywords: Welfare Costs; Catastrophes; Pandemics; Value of Statistical Life; Consumption Risk
JEL Codes: D81; H5; Q5; Q58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| WTP to avert a pandemic (H12) | WTP to avert a drop in consumption (D11) |
| Risk of pandemics (H12) | WTP to reduce consumption risk (D11) |
| WTP to avert a pandemic (H12) | WTP to avert both types of catastrophes (H84) |
| Background risk of consumption disasters (D18) | WTP to avert pandemics (H12) |