How Much is it Worth to Prevent a Pandemic? A Simple Rule-of-Thumb for Policymakers
Recent experience with the coronavirus has raised important questions about the preparedness of governments for such an event. However, an important question as it pertains to preparedness is determining how much a government should be willing to spend each year in order to prevent a pandemic that might occur at some unknown date in the future. In this paper, I present both a deterministic and a stochastic valuation of preventing deaths from a future pandemic using the tools of modern finance. In particular, I argue that estimates of the statistical value of life imply that the value of preventing deaths from a future pandemic at an unknown date can be determined by pricing a contingent claim on the average wage in the economy. When the time path of the wage is deterministic and the planner is indifferent between generations, this implies that the value today of preventing a pandemic at any point in the future is equal to the value of preventing a pandemic today. This is a straightforward result. I then show that when the time path of the wage is stochastic and markets are complete, the value of preventing a pandemic is identical to the deterministic case. However, this result does not depend on assumptions about the planner's rate of time preference. Finally, I consider the case in which the time path of the average wage is stochastic and markets are incomplete. When markets are incomplete the amount the government should be willing to spend depends on the duration between pandemics. If the likelihood of a pandemic is uniformly distributed over the next century, this latter model implies that the government should be willing to spend around $345,000 per life saved per year. In contrast, the deterministic case and the complete markets case implies that the government should spend $300,000 per life saved per year. Thus, I argue that these simpler models actually provide a useful rule of thumb for policymakers
Year of publication: |
2022
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Authors: | Hendrickson, Joshua R. |
Publisher: |
[S.l.] : SSRN |
Saved in:
freely available
Extent: | 1 Online-Ressource (15 p) |
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Type of publication: | Book / Working Paper |
Language: | English |
Notes: | Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments October 2, 2020 erstellt |
Other identifiers: | 10.2139/ssrn.4181780 [DOI] |
Source: | ECONIS - Online Catalogue of the ZBW |
Persistent link: https://www.econbiz.de/10014079251
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