Creative Destruction vs Destructive Destruction ? : A Schumpeterian Approach for Adaptation and Mitigation

This article aims to show how a market exposed to a catastrophic event finds the balance between adaptation and mitigation policies through R&D policy. We also study the effect of pollution tax on the long-run growth rate and the implications of catastrophe probability on this effect. Our results suggest that the economy can increase its R&D level even with a higher catastrophe probability. This is possible only if the penalty rate due to an abrupt event is sufficiently high. We show that pollution tax could increase the long-run growth. Additionally, the catastrophe probability increases the amplitude of this positive effect if the penalty rate is high enough. Lastly, we show that the pollution growth could be higher with less polluting inputs, which we call a Jevons type paradox.