Working Paper: NBER ID: w31067
Authors: Viral V. Acharya; Timothy Johnson; Suresh Sundaresan; Steven Zheng
Abstract: We study an economy subject to recurrent disasters when the frequency and duration of the disasters are unobservable parameters. Imprecise information about transition intensities increases the probability of the current state effectively lasting forever. In a disaster, uncertainty about duration makes disasters subjectively much worse and can make the welfare value of information extremely high. However, in advance of a disaster, uncertainty about the arrival rate can be welfare-increasing. Agents optimally invest less in mitigation than under full information and pay less for insurance against the next disaster.
Keywords: Disasters; Parameter Uncertainty; Economic Behavior; Welfare Implications
JEL Codes: D6; D8; E21; E32; G10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Uncertainty about the duration of disasters (H84) | Amplified agents' responses (D82) |
| Uncertainty about the duration of disasters (H84) | More conservative investment and consumption behaviors (E21) |
| Uncertainty about the arrival rate of disasters (H84) | Diminished preparedness (H84) |
| Uncertainty about the arrival rate of disasters (H84) | Less investment in mitigation strategies and insurance (G52) |
| Resolving parameter uncertainty (D80) | Welfare gain (D69) |
| Information precision (D83) | Welfare outcomes (I38) |
| Agents' beliefs about disaster frequency (D80) | Investment choices (G11) |
| Agents' beliefs evolve over time (D84) | Investment choices (G11) |