TY  - JOUR
AU  - Weitzman,Martin
TI  - Structural Uncertainty and the Value of Statistical Life in the Economics of Catastrophic Climate Change
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13490
PY  - 2007
Y2  - October 2007
UR  - http://www.nber.org/papers/w13490
L1  - http://www.nber.org/papers/w13490.pdf
N1  - Author contact info:
Martin Weitzman
Department of Economics
Harvard University
Littauer 313
Cambridge, MA 02138
Tel: 617/495-5133
Fax: 617/495-8570
E-Mail: mweitzman@harvard.edu
AB  - Using climate change as a prototype motivating example, this paper analyzes the implications of structural uncertainty for the economics of low-probability high-impact catastrophes. The paper shows that having an uncertain multiplicative parameter, which scales or amplifies exogenous shocks and is updated by Bayesian learning, induces a critical "tail fattening" of posterior-predictive distributions. These fattened tails can have strong implications for situations (like climate change) where a catastrophe is theoretically possible because prior knowledge cannot place sufficiently narrow bounds on overall damages. The essence of the problem is the difficulty of learning extreme-impact tail behavior from finite data alone. At least potentially, the influence on cost-benefit analysis of fat-tailed uncertainty about the scale of damages -- coupled with a high value of statistical life -- can outweigh the influence of discounting or anything else.
ER  -