Economic benefits of irreversible risk reduction by disaster prevention investment

Abstract

Once serious disaster occurs, many victims may simultaneously lose their lives. Once dead, one can never recover one's life any longer. One is always under disaster risks and is never free from them throughout one's life. Among others, this study exclusively focuses upon two distinct features of fatal risks by disaster: backgroundness and irreversibility. The disaster prevention investment is the basic means to reduce the fatal risks that people may be killed in disaster. In this paper, a dynamic optimal consumption model with disaster risks is formulated to analyze how the consumer's demands for composite goods and life insurance are modified by reduction of the fatal risks. The economic benefits of disaster prevention investment can be measured by investigating how the present value of the stream of utility that the representative consumer can derive from his/her life-long consumption plan, is influenced by change in the fatal risks.