TY  - JOUR
AU  - Barro,Robert J.
TI  - On the Welfare Costs of Consumption Uncertainty
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12763
PY  - 2006
Y2  - December 2006
UR  - http://www.nber.org/papers/w12763
L1  - http://www.nber.org/papers/w12763.pdf
N1  - Author contact info:
Robert J. Barro
Department of Economics
Littauer Center 218
Harvard University
Cambridge, MA 02138
Tel: 617/495-3203
Fax: 617/496-8629
E-Mail: rbarro@harvard.edu
AB  - 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.
ER  -