RIETI - A Theory of Disasters and Long-run Growth

We examine the long-term consequences to economic growth of disasters using a discrete-time endogenous growth model. We consider two types of hypothetical disasters: historical disasters, which follow a Bernoulli process, and periodic disasters, which are taken as a regular event by assuming that one period is a sufficient time period. We show that the effects of historical disasters on the steady state growth rate depend on the intertemporal elasticity of substitution for consumption. Specifically, when it is less than one, more destructive disasters or more frequent occurrence of historical disasters foster investment in human capital, which results in a higher economic growth rate. This conditionally supports the empirical finding: disasters may positively affect long-run economic growth. We also show the effects of historical and periodic disasters on resource allocation and industrial composition at the steady state and on the convergence speed.