Inertia in risk; improving economic models of catastrophes
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Crepin, Anne-Sophie and Eric Nævdal
We model endogenous catastrophic risk in a new way we term inertia risk, which accounts for delays between physical variables and the hazard rate - a characteristic often observed in reality. The added realism significantly impacts optimal policies relative to the standard model of catastrophic risk. The probability of a catastrophe occurring at some point in time may span the entire interval [0, 1] and is not 0 or 1 as is typical in standard models. Inertia risk may also generate path dependencies. We illustrate the implications for policy in a simple model of climate change.
Catastrophic risk, climate change, lagged effects, resource management.
C02; C61; Q20; Q54
Prosjekt info:Oppdragsgiver: Norges forskningsråd
Oppdragsgivers prosjektnr.: 196199
Frisch prosjekt: 3172 - Managing Thresholds and Uncertainty in Resource Economics