R. Barro. Working Paper, 12763. National Bureau of Economic Research, (December 2006)
DOI: 10.3386/w12763
Abstract
Satisfactory calculations of the welfare cost of aggregate consumption uncertainty require a framework that replicates major features of asset prices and returns, such as the high equity premium and low risk-free rate. A Lucas-tree model with rare but large disasters is such a framework. In a baseline simulation, the welfare cost of disaster risk is large -- society would be willing to lower real GDP by about 20% each year to eliminate all disaster risk, including wars. In contrast, the welfare cost from usual economic fluctuations is much smaller, though still important -- corresponding to lowering GDP by around 1.5% each year.
%0 Report
%1 Barro:NBER:2006
%A Barro, Robert J.
%B Working Paper Series
%D 2006
%K disaster equity-premium welfare
%N 12763
%R 10.3386/w12763
%T On the Welfare Costs of Consumption Uncertainty
%U http://www.nber.org/papers/w12763
%X Satisfactory calculations of the welfare cost of aggregate consumption uncertainty require a framework that replicates major features of asset prices and returns, such as the high equity premium and low risk-free rate. A Lucas-tree model with rare but large disasters is such a framework. In a baseline simulation, the welfare cost of disaster risk is large -- society would be willing to lower real GDP by about 20% each year to eliminate all disaster risk, including wars. In contrast, the welfare cost from usual economic fluctuations is much smaller, though still important -- corresponding to lowering GDP by around 1.5% each year.
@techreport{Barro:NBER:2006,
abstract = {Satisfactory calculations of the welfare cost of aggregate consumption uncertainty require a framework that replicates major features of asset prices and returns, such as the high equity premium and low risk-free rate. A Lucas-tree model with rare but large disasters is such a framework. In a baseline simulation, the welfare cost of disaster risk is large -- society would be willing to lower real GDP by about 20% each year to eliminate all disaster risk, including wars. In contrast, the welfare cost from usual economic fluctuations is much smaller, though still important -- corresponding to lowering GDP by around 1.5% each year.},
added-at = {2014-10-22T23:19:44.000+0200},
author = {Barro, Robert J.},
biburl = {https://www.bibsonomy.org/bibtex/2a00063acba6c54309ed4edabf70e71d1/fcqms},
description = {On the Welfare Costs of Consumption Uncertainty},
doi = {10.3386/w12763},
institution = {National Bureau of Economic Research},
interhash = {ff9acaee7713b9dc8043e641f5cf9128},
intrahash = {a00063acba6c54309ed4edabf70e71d1},
keywords = {disaster equity-premium welfare},
month = {December},
number = 12763,
series = {Working Paper Series},
timestamp = {2014-10-22T23:19:44.000+0200},
title = {On the Welfare Costs of Consumption Uncertainty},
type = {Working Paper},
url = {http://www.nber.org/papers/w12763},
year = 2006
}