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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.

Suggested Citation

  • Martin Weitzman, 2007. "Structural Uncertainty and the Value of Statistical Life in the Economics of Catastrophic Climate Change," NBER Working Papers 13490, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:13490
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    File URL: http://www.nber.org/papers/w13490.pdf
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    References listed on IDEAS

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    1. Jérôme Foncel & Nicolas Treich, 2005. "Fear of Ruin," Journal of Risk and Uncertainty, Springer, vol. 31(3), pages 289-300, December.
    2. Robert E. Hall & Charles I. Jones, 2007. "The Value of Life and the Rise in Health Spending," The Quarterly Journal of Economics, Oxford University Press, vol. 122(1), pages 39-72.
    3. 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.
    4. Geweke, John, 2001. "A note on some limitations of CRRA utility," Economics Letters, Elsevier, vol. 71(3), pages 341-345, June.
    5. 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, vol. 28(2), pages 444-464, March.
    6. Aumann, Robert J & Kurz, Mordecai, 1977. "Power and Taxes," Econometrica, Econometric Society, vol. 45(5), pages 1137-1161, July.
    7. 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.
    8. repec:reg:rpubli:292 is not listed on IDEAS
    9. Partha Dasgupta, 2007. "Commentary: The Stern Review's Economics of Climate Change," National Institute Economic Review, National Institute of Economic and Social Research, vol. 199(1), pages 4-7, January.
    10. Martin L. Weitzman, 2007. "Subjective Expectations and Asset-Return Puzzles," American Economic Review, American Economic Association, vol. 97(4), pages 1102-1130, September.
    11. repec:reg:rpubli:282 is not listed on IDEAS
    12. Scott Barrett, 2008. "The Incredible Economics of Geoengineering," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 39(1), pages 45-54, January.
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    Citations

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    Cited by:

    1. Nicolas Bouleau, 2009. "Mathematization of risks and economic studies in global change modelling," Working Papers halshs-00435959, HAL.
    2. Kverndokk, Snorre & Nævdal, Eric & Nøstbakken, Linda, 2014. "The trade-off between intra- and intergenerational equity in climate policy," European Economic Review, Elsevier, vol. 69(C), pages 40-58.
    3. 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, vol. 104(1), pages 51-87, January.
    4. Geoffrey Heal, 2008. "Climate Economics: A Meta-Review and Some Suggestions," NBER Working Papers 13927, National Bureau of Economic Research, Inc.
    5. Dannenberg, Astrid & Mennel, Tim & Osberghaus, Daniel & Sturm, Bodo, 2009. "The economics of adaptation to climate change: the case of Germany," ZEW Discussion Papers 09-057, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

    More about this item

    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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