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A Theory of Disasters and Long-run Growth

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  • AKAO Ken-Ichi
  • SAKAMOTO Hiroaki

Abstract

We examine the long-term consequences to economic growth of disasters using a discrete-time endogenous growth model. We consider two types of hypothetical disasters: historical disasters, which follow a Bernoulli process, and periodic disasters, which are taken as a regular event by assuming that one period is a sufficient time period. We show that the effects of historical disasters on the steady state growth rate depend on the intertemporal elasticity of substitution for consumption. Specifically, when it is less than one, more destructive disasters or more frequent occurrence of historical disasters foster investment in human capital, which results in a higher economic growth rate. This conditionally supports the empirical finding: disasters may positively affect long-run economic growth. We also show the effects of historical and periodic disasters on resource allocation and industrial composition at the steady state and on the convergence speed.

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Paper provided by Research Institute of Economy, Trade and Industry (RIETI) in its series Discussion papers with number 13061.

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Length: 40 pages
Date of creation: Jul 2013
Date of revision:
Handle: RePEc:eti:dpaper:13061

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  1. Crespo Cuaresma & Hlouskova & Obersteiner, 2008. "Natural Disasters As Creative Destruction? Evidence From Developing Countries," Economic Inquiry, Western Economic Association International, vol. 46(2), pages 214-226, 04.
  2. Ryo Horii & Masako Ikefuji, 2010. "Natural Disasters in a Two-Sector Model of Endogenous Growth," Working Papers 992, Economic Growth Center, Yale University.
  3. Mark Skidmore & Hideki Toya, 2005. "Economic Development and the Impacts of Natural Disasters," Working Papers 05-04, UW-Whitewater, Department of Economics.
  4. Annette Vissing-Jorgensen, 2002. "Limited Asset Market Participation and the Elasticity of Intertemporal Substitution," NBER Working Papers 8896, National Bureau of Economic Research, Inc.
  5. Blomberg, S. Brock & Hess, Gregory D. & Orphanides, Athanasios, 2004. "The macroeconomic consequences of terrorism," Journal of Monetary Economics, Elsevier, vol. 51(5), pages 1007-1032, July.
  6. Alvarez, Fernando & Stokey, Nancy L., 1998. "Dynamic Programming with Homogeneous Functions," Journal of Economic Theory, Elsevier, vol. 82(1), pages 167-189, September.
  7. Robert E. Hall, 1981. "Intertemporal Substitution in Consumption," NBER Working Papers 0720, National Bureau of Economic Research, Inc.
  8. Annette Vissing-Jorgensen, 2002. "Limited Asset Market Participation and the Elasticity of Intertemporal Substitution," Journal of Political Economy, University of Chicago Press, vol. 110(4), pages 825-853, August.
  9. Matthew E. Kahn, 2005. "The Death Toll from Natural Disasters: The Role of Income, Geography, and Institutions," The Review of Economics and Statistics, MIT Press, vol. 87(2), pages 271-284, May.
  10. Mark Skidmore & Hideki Toya, 2002. "Do Natural Disasters Promote Long-Run Growth?," Economic Inquiry, Western Economic Association International, vol. 40(4), pages 664-687, October.
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