Technical Report Optimal disaster-preventive expenditure in a dynamic and stochastic model

Motoyama, Takumi

15-03-Rev.pp.1 - 36 , 2016-10 , Graduate School of Economics and Osaka School of International Public Policy (OSIPP) Osaka University
* Revised: [15-03, 2015]
The purpose of this study is to present an analytical framework for publicly optimal disasterpreventive expenditure. We examine the optimal policy combination of tax rate, disaster-preventive expenditure, and productive government expenditure in a neoclassical growth model, in which natural disasters occur stochastically and partially destroy existing capital. Based on this model, we can decompose the welfare effect of raising preventive expenditure into three effects: the damage reduction, crowding out, and precautionary effects. By identifying these marginal benefits and costs, we obtain the policy conditions that maximize household welfare. Furthermore, we show that optimal prevention is increasing in disaster probability, and by using a numerical example, we show that there is an inverse U-shaped relationship between the expected growth rate and disaster probability.

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