Structural Uncertainty and the Value of Statistical Life in the Economics of Catastrophic Climate Change

Using climate change as a prototype motivating example, this paper analyzes the implications of structural uncertainty for the economics of low-probability high-impact catastrophes. The paper shows that having an uncertain multiplicative parameter, which scales or ampli…es exogenous shocks and is updated by Bayesian learning, induces a critical “tail fattening” of posterior-predictive distributions. These fattened tails can have strong implications for situations (like climate change) where a catastrophe is theoretically possible because prior knowledge cannot place su¢ ciently narrow bounds on overall damages. The essence of the problem is the di¢ culty of learning extremeimpact tail behavior from …nite data alone. At least potentially, the in‡uence on cost-bene…t analysis of fat-tailed uncertainty about the scale of damages – coupled with a high value of statistical life – can outweigh the in‡uence of discounting or