Optimal disaster-preventive expenditure in a dynamic and stochastic model

Takumi Motoyama ()
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Takumi Motoyama: Graduate School of Economics, Osaka University

No 15-03, Discussion Papers in Economics and Business from Osaka University, Graduate School of Economics

Abstract: The purpose of this study is to present an analytical framework for publicly optimal disaster- preventive expenditure. We examine an optimal policy combination of tax rate, disaster-preventive expenditure, and government productive expenditure in the neoclassical growth model, in which nat- ural 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: damage-reduction, crowding-out, and precautionary savings effect. By identifying these marginal benefits and costs, we obtain policy conditions that maximize household welfare. Furthermore, the expected growth rate under optimal policy is considered, and an inverse -U-shaped relationship between the growth rate and disaster probability is shown.

Keywords: Natural disasters; Disaster-preventive expenditure; Optimal policy (search for similar items in EconPapers)
JEL-codes: E13 H4 Q54 Q58 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2015-04
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Persistent link: https://EconPapers.repec.org/RePEc:osk:wpaper:1503

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