Title: On the welfare costs of consumption uncertainty
First published: 2006
Description: "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"--National Bureau of Economic Research web site.
Subjects: Consumption (Economics), Economic aspects, Economic aspects of Risk, Mathematical models, Risk