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Disaster Risks, Disaster Strikes, and Economic Growth: the Role of Preferences

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  • Thomas Douenne

    (Paris School of Economics)

Abstract

This paper studies the role of preferences on the link between disasters, growth, and welfare. An endogenous growth model with endogenous disasters is presented in which one can derive closed-form solutions with recursive preferences. The model distinguishes disaster risks and disaster strikes and highlights the numerous mechanisms through which they may affect growth. It is shown that separating aversion to risk from the elasticity of inter-temporal substitution bears critical implications that enable to better understand these mechanisms. In a calibration of the model based on empirical evidence about disaster impacts in the U.S., it is shown that precautionary savings are unlikely to be sufficient to generate a positive link between disasters and growth as sometimes encountered in the empirical literature. The paper also assesses the impact of disasters on welfare and highlights the large benefits that could be obtained by enhancing insurance coverage. (Copyright: Elsevier)

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  • Thomas Douenne, 2020. "Disaster Risks, Disaster Strikes, and Economic Growth: the Role of Preferences," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 38, pages 251-272, October.
    • Handle: RePEc:red:issued:18-396
    DOI: 10.1016/j.red.2020.04.007
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    Cited by:

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    3. Gomes Orlando, 2024. "Economic Growth in the Age of Ubiquitous Threats: How Global Risks are Reshaping Growth Theory," Economics - The Open-Access, Open-Assessment Journal, De Gruyter, vol. 18(1), pages 1-15, January.
    4. Alexandra Brausmann & Lucas Bretschger, 2024. "Escaping Damocles’ Sword: Endogenous Climate Shocks in a Growing Economy," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 87(6), pages 1545-1592, June.
    5. Alessandro Cantelmo, 2022. "Rare Disasters, the Natural Interest Rate and Monetary Policy," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 84(3), pages 473-496, June.
    6. Dominika Czyz & Karolina Safarzynska, 2023. "Catastrophic Damages and the Optimal Carbon Tax Under Loss Aversion," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 85(2), pages 303-340, June.
    7. Augeraud-Véron, Emmanuelle & Fabbri, Giorgio & Schubert, Katheline, 2021. "Prevention and mitigation of epidemics: Biodiversity conservation and confinement policies," Journal of Mathematical Economics, Elsevier, vol. 93(C).
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    9. Jere Lehtomaa & Clément Renoir, 2023. "The Economic Impact of Tropical Cyclones: Case Studies in General Equilibrium," CER-ETH Economics working paper series 23/382, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
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    More about this item

    Keywords

    Environmental disasters; Endogenous growth; Recursive utility; Precautionary savings;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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