A Contribution to Mega-Disaster Economics

Abstract

Abstract Standard economic analysis stumbles on mega-disasters’ specific features. We impute these shortcomings to an invariable recourse to the expected value metric and its decoupling from discounting. We develop a two-pronged quantitative approach to address this issue: first we introduce a family of discount models (Lomax based) bridging the gap between the exponential and the hyperbolic discount models. We then define a functional, the Δ-transform, that bonds the discount model with the disaster impact underlying random variable. Key properties of the Δ-transform are displayed along with closed formula of special functions in the case of typical power law distributions suitable for modelling disasters and mega-disasters. Practical implementation challenges related to uncertainty management are discussed, along with the extent to which our approach challenges conventional wisdom on mainstream disaster economics and other situations featuring long-term horizons and high uncertainty. Classification code ( JEL): C20, C65, D61, H43 Q54

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