MIT Sloan School of Management
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Bank of Tokyo-Mitsubishi Ltd. Professor in Finance and Economics and a Professor of Applied Economics at the MIT Sloan School of Management. His most recent research focuses on economic policies related to rare disasters, such as those that would severely affect the entire U.S. or world economies. Examples include possible but low-probability catastrophic outcomes from global warming or nuclear terrorism. At issue is how such low-probability but extreme outcomes should affect current policy, for example, in reducing greenhouse gas (GHG) emissions. He also has continued to work on irreversible investment decisions, the role of network effects in market structure, and the behavior of commodity prices.
On the 1st of December 2020, Prof. Robert S. Pindyck presented “Welfare Costs of Catastrophes: Lost Consumption and Lost Lives”, co authored with Ian W. R. Martin (London School of Economics). Keywords: Catastrophes, Catastrophic Events, Macroeconomic Contractions, Disasters, Fatalities, Value of Life, Willingness to Pay, Pandemics.
Abstract
Most of the literature on the economics of catastrophes assumes that such events cause a reduction in the stream of consumption, as opposed to widespread fatalities. Here we show how to incorporate death in a model of catastrophe avoidance, and how a catastrophic loss of life can be expressed as a welfare-equivalent drop in consumption. We examine how potential fatalities affect the policy interdependence of catastrophic events and “willingness to pay” (WTP) to avoid them. Using estimates of the “value of a statistical life” (VSL), we find the WTP to avoid major pandemics, and show it is large (10% or more of annual consumption) and partly driven by the risk of macroeconomic contractions. Likewise, the risk of pandemics significantly increases the WTP to reduce consumption risk. Our work links the VSL and consumption disaster literatures.