Mitigating Disaster Risks to Sustain Growth
We provide the planner's solution to a model where households learn from exogenous natural disaster arrivals about arrival rates and spend to mitigate future damages. Mitigation cannot be decentralized due to positive externalities from curtailing aggregate risks. First-best can be implemented by capital taxes and mitigation subsidies. Willingness-to-pay, toward public health for pandemics or environmental protection for climate disasters, depends on mitigation efficacy. Efficacy can be inferred from damage functions that depend on prior arrivals which determine preparedness. Regulatory risks arise since disaster leads to pessimistic arrival-rate beliefs and taxes or mandates to fund mitigation, which reduce consumption, investment and stock-market value.
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Document Object Identifier (DOI): 10.3386/w27066