Structural Uncertainty and the Value of Statistical Life in the Economics of Catastrophic Climate Change

36 Pages Posted: 16 Oct 2007 Last revised: 18 Dec 2007

Martin Weitzman

Harvard University - Department of Economics

Date Written: October 2007

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

Weitzman, Martin, Structural Uncertainty and the Value of Statistical Life in the Economics of Catastrophic Climate Change (October 2007). NBER Working Paper No. w13490. Available at SSRN: https://ssrn.com/abstract=1021968

Martin L. Weitzman (Contact Author)

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
617-495-5133 (Phone)

Register to save articles to
your library

Register

Paper statistics

Downloads
44
Abstract Views
609
PlumX