TY  - JOUR
AU  - Pindyck,Robert S.
AU  - Wang,Neng
TI  - The Economic and Policy Consequences of Catastrophes
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 15373
PY  - 2009
Y2  - September 2009
UR  - http://www.nber.org/papers/w15373
L1  - http://www.nber.org/papers/w15373.pdf
N1  - Author contact info:
Robert S. Pindyck
MIT Sloan School of Management
100 Main Street, E62-522
Cambridge, MA  02142
Tel: 617/253-6641
Fax: 617/258-6855
E-Mail: RPINDYCK@MIT.EDU

Neng Wang
Columbia Business School
3022 Broadway, Uris Hall 812
New York, NY 10027
Tel: 212/854-3869
Fax: 212/662-8474
E-Mail: nw2128@columbia.edu
AB  - What is the likelihood that the U.S. will experience a devastating catastrophic event over the next few decades that would substantially reduce the capital stock, GDP and wealth? Can the probability and possible impact of such an event be inferred from economic data? And how much should society be willing to pay to reduce the probability or impact of a catastrophe? We address these questions using a general equilibrium model that describes production, capital accumulation, and household preferences, and includes the possible arrival of catastrophic shocks. Calibrating to economic and financial data shows the annual mean arrival rate of shocks to be about 1.5% and the expected loss from a shock to be about 30%. We use the model to calculate the tax on consumption society would accept to reduce the probability of a shock, and the cost to insure against its actual impact.
ER  -