@techreport{NBERw12763,
 title = "On the Welfare Costs of Consumption Uncertainty",
 author = "Robert J. Barro",
 institution = "National Bureau of Economic Research",
 type = "Working Paper",
 series = "Working Paper Series",
 number = "12763",
 year = "2006",
 month = "December",
 URL = "http://www.nber.org/papers/w12763",
 abstract = {Satisfactory calculations of the welfare cost of aggregate consumption uncertainty require a framework that replicates major features of asset prices and returns, such as the high equity premium and low risk-free rate.  A Lucas-tree model with rare but large disasters is such a framework.  In a baseline simulation, the welfare cost of disaster risk is large -- society would be willing to lower real GDP by about 20% each year to eliminate all disaster risk, including wars.  In contrast, the welfare cost from usual economic fluctuations is much smaller, though still important -- corresponding to lowering GDP by around 1.5% each year.},
}