The Day After Tomorrow: Mitigation and Adaptation Policies to Deal with Uncertainty

31 Pages Posted: 3 Sep 2021

See all articles by Davide Bazzana

Davide Bazzana

University of Brescia - Department of Economics and Management; Fondazione Eni Enrico Mattei (FEEM)

Francesco Menoncin

University of Brescia

Sergio Vergalli

University of Brescia - Department of Economics; Fondazione Eni Enrico Mattei (FEEM), Milan

Date Written: September 2, 2021

Abstract

The catastrophic events are characterized by “low frequency and high severity”. Nevertheless, during the last decades, both the frequency and the magnitude of these events have been significantly rising worldwide. In 2021, the European Commission adopted a new Strategy on Adaptation to Climate Change aiming to reinforce the adaptive capacity and minimize vulnerability to the effects of climate change and natural catastrophes. In a continuous time framework over an infinite horizon, we solve in closed form the problem of a representative consumer who holds a production technology (firm) and who optimises with respect to both the intertemporal consumption and the mix between an insurance (adaptation) against the magnitude of the catastrophic losses, and an effort strategy (mitigation) aimed at reducing the frequency of such losses. The catastrophic events are modelled as a Poisson jump process. We then propose some numerical simulations calibrated to the country-specific data of the five main European economies (Germany, France, Italy, Spain, and Netherlands). Our model demonstrates that an optimal mix of mitigation/effort strategies allows to reduce the volatility of the economic growth rate, even if its level may be lowered due to the effort costs. Simulations allow us to also conclude that different countries must optimally react differently to catastrophes, which means that a one-for-all policy does not seem to be optimal.

Keywords: Uncertainty Modelling, Catastrophic Events, Mitigation, Adaptation, Optimal management

JEL Classification: C6; C61; Q5; Q54

Suggested Citation

Bazzana, Davide and Menoncin, Francesco and Vergalli, Sergio, The Day After Tomorrow: Mitigation and Adaptation Policies to Deal with Uncertainty (September 2, 2021). FEEM Working Paper No. 22.2021, Available at SSRN: https://ssrn.com/abstract=3916252 or http://dx.doi.org/10.2139/ssrn.3916252

Davide Bazzana (Contact Author)

University of Brescia - Department of Economics and Management ( email )

Contrada Santa Chiara, 50
BRESCIA, BS 25122
Italy

Fondazione Eni Enrico Mattei (FEEM) ( email )

C.so Magenta 63
Milano, 20123
Italy

Francesco Menoncin

University of Brescia

Piazza del Mercato, 15
25122 Brescia
Italy

Sergio Vergalli

University of Brescia - Department of Economics ( email )

Via San Faustino 74B
Brescia, 25122
Italy

Fondazione Eni Enrico Mattei (FEEM), Milan ( email )

Corso Magenta 63
20123 Milan
Italy

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