Structural Uncertainty and the Value of Statistical Life in the Economics of Catastrophic Climate Change
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.
|Date of creation:||Oct 2007|
|Date of revision:|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
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- 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, vol. 27(1), pages 5-76, August.
- W. Kip Viscusi & Joseph E. Aldy, 2003. "The Value of a Statistical Life: A Critical Review of Market Estimates throughout the World," NBER Working Papers 9487, National Bureau of Economic Research, Inc.
- Geweke, John, 2001. "A note on some limitations of CRRA utility," Economics Letters, Elsevier, vol. 71(3), pages 341-345, June.
- Richard S.J. Tol, 2000. "Is the Uncertainty about Climate Change Too Large for Expected Cost-Benefit Analysis?," Working Papers FNU-3, Research unit Sustainability and Global Change, Hamburg University, revised Sep 2000.
- François Bellavance & Georges Dionne & Martin Lebeau, 2006.
"The Value of a Statistical Life: a Meta-Analysis with a Mixed Effects Regression Model,"
Cahiers de recherche
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