Investment in adaptation capital reduces the damage from extreme weather, mitigating the welfare cost of climate change. Federal aid for disaster relief reduces the net costs to localities that experience extreme weather, decreasing their incentives to invest in adaptation capital. We develop a heterogenous-agent macro model to quantify the relationship between adaptation capital, federal disaster policy, and climate change. We find that federal aid for disaster relief substantially reduces adaptation investment. However, the federal subsidy for adaptation more than offsets this moral hazard effect. We introduce climate change into the model as a permanent, increase in the severity of extreme weather. We find that adaptation reduces the welfare cost of this climate change by 15-20 percent.
Speaker: Stephie Fried, Arizona State Univ.
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