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Structural Uncertainty and the Value of Statistical Life in the Economics of Catastrophic Climate Change

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  • Martin Weitzman

Abstract

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.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13490.

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Date of creation: Oct 2007
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Handle: RePEc:nbr:nberwo:13490

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  1. Robert E. Hall & Charles I. Jones, 2005. "The value of life and the rise in health spending," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco.
  2. Viscusi, W Kip & Aldy, Joseph E, 2003. " The Value of a Statistical Life: A Critical Review of Market Estimates throughout the World," Journal of Risk and Uncertainty, Springer, Springer, vol. 27(1), pages 5-76, August.
  3. Jérôme Foncel & Nicolas Treich, 2005. "Fear of Ruin," Journal of Risk and Uncertainty, Springer, Springer, vol. 31(3), pages 289-300, December.
  4. Partha Dasgupta, 2007. "The Stern Review's economics of climate change," National Institute Economic Review, National Institute of Economic and Social Research, National Institute of Economic and Social Research, vol. 199(1), pages 4-7, January.
  5. repec:reg:rpubli:292 is not listed on IDEAS
  6. Aumann, Robert J & Kurz, Mordecai, 1977. "Power and Taxes," Econometrica, Econometric Society, Econometric Society, vol. 45(5), pages 1137-61, July.
  7. Geweke, John, 2001. "A note on some limitations of CRRA utility," Economics Letters, Elsevier, Elsevier, vol. 71(3), pages 341-345, June.
  8. Martin L. Weitzman, 2007. "Subjective Expectations and Asset-Return Puzzles," American Economic Review, American Economic Association, American Economic Association, vol. 97(4), pages 1102-1130, September.
  9. repec:reg:rpubli:282 is not listed on IDEAS
  10. repec:reg:wpaper:292 is not listed on IDEAS
  11. Bellavance, Franois & Dionne, Georges & Lebeau, Martin, 2009. "The value of a statistical life: A meta-analysis with a mixed effects regression model," Journal of Health Economics, Elsevier, Elsevier, vol. 28(2), pages 444-464, March.
  12. repec:reg:wpaper:282 is not listed on IDEAS
  13. Richard S.J. Tol, 2000. "Is the Uncertainty about Climate Change Too Large for Expected Cost-Benefit Analysis?," Working Papers, Research unit Sustainability and Global Change, Hamburg University FNU-3, Research unit Sustainability and Global Change, Hamburg University, revised Sep 2000.
  14. Scott Barrett, 2008. "The Incredible Economics of Geoengineering," Environmental & Resource Economics, European Association of Environmental and Resource Economists, European Association of Environmental and Resource Economists, vol. 39(1), pages 45-54, January.
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Cited by:
  1. Stéphane Hallegatte & Fanny Henriet & Jan Corfee-Morlot, 2011. "The economics of climate change impacts and policy benefits at city scale: a conceptual framework," Climatic Change, Springer, Springer, vol. 104(1), pages 51-87, January.
  2. Snorre Kverndokk & Eric Nævdal & Linda Nøstbakken, 2013. "The Trade-off between Intra- and Intergenerational Equity in Climate Policy," CESifo Working Paper Series 4285, CESifo Group Munich.
  3. repec:hal:wpaper:halshs-00435959 is not listed on IDEAS
  4. Geoffrey Heal, 2008. "Climate Economics: A Meta-Review and Some Suggestions," NBER Working Papers 13927, National Bureau of Economic Research, Inc.

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