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Abstract

Economic modeling of catastrophic threats has largely dealt with each threat in isolation. Recently, Martin and Pindyck (2015) forcefully argued that such an approach can be misleading in the all too common situation of multiple threats, and offered a regulation framework for such situations. The present work extends this framework in two ways: first, it allows for endogenous catastrophic threats; second, it considers intertemporal policies, allowing, inter alia, for gradual threat-mitigation actions to accumulate over time. The long run properties of optimal policies are characterized in terms of key parameters. Possible effects of background threats on the optimal response to a potential catastrophe are illustrated numerically.

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