Averting Catastrophes that Kill
We face a variety of potential catastrophes; nuclear or bioterrorism, a climate catastrophe, and a "mega-virus" are examples. Martin and Pindyck (AER 2015) showed that decisions to avert such catastrophes are interdependent, so that simple cost-benefit analysis breaks down. They assumed that catastrophic events cause "destruction," i.e., a reduction in the stream of consumption. But some catastrophes cause death instead of, or in addition to, destruction. Here we incorporate death in a model of catastrophe avoidance, and show how it affects the interdependence of catastrophic events and the "willingness to pay" to avoid those events.
Our thanks to Christian Gollier, Antony Millner and participants at various seminars for helpful comments and suggestions. The authors declare that they have no relevant or material financial interests that related to the research described in this paper. This research was partially supported by the ERC under Starting Grant 639744. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.