Averting Catastrophes that Kill

We face a variety of potential catastrophes; nuclear or bioterrorism, a climate catastrophe, and a "mega-virus" are examples. Martin and Pindyck (AER 2015) showed that decisions to avert such catastrophes are interdependent, so that simple cost-benefit analysis breaks down. They assumed that catastrophic events cause "destruction," i.e., a reduction in the stream of consumption. But some catastrophes cause death instead of, or in addition to, destruction. Here we incorporate death in a model of catastrophe avoidance, and show how it affects the interdependence of catastrophic events and the "willingness to pay" to avoid those events.