Discussion paper
DP18026 Disasters with Unobservable Duration and Frequency: Intensified Responses and Diminished Preparednes
We study an economy subject to recurrent disasters when the frequency
and duration of the disasters are unobservable parameters. Imprecise information
about transition intensities increases the probability of the current state
effectively lasting forever. In a disaster, uncertainty about duration makes disasters
subjectively much worse and can make the welfare value of information
extremely high. However, in advance of a disaster, uncertainty about the arrival
rate can be welfare-increasing. Agents optimally invest less in mitigation
than under full information and pay less for insurance against the next disaster.
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