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The Global Impacts of Climate Change on Risk Preferences

Author

Listed:
  • Wesley Howden

    (University of Arizona)

  • Remy Levin

    (University of Connecticut)

Abstract

We study the direct impacts that long-run experiences of climate change have on individual risk preferences. Using panel surveys from Indonesia and Mexico (total N = 25,000), we link within-person changes in elicited risk preferences to state-level, lifetime experiences of climate change. In line with the predictions of a Bayesian model of learning over background climate risk, we find that in both settings increases in the experienced means of temperature and precipitation cause significant decreases in measured risk aversion, while increases in the experienced variance of temperature in Indonesia and the variance of precipitation in Mexico lead to significant increases in measured risk aversion. We replicate this analysis globally using a survey with a representative sample from 75 countries (N = 75,000) containing an elicited measure of risk preference which we link to country-level, lifetime climate experiences. We find significant results for both the means and variances of both climate variables that are consistent with our panel analyses. Across all settings, experiences of climate variance have first-order effects, with coefficient magnitudes of the standard deviation of climate 0.6-2.6 times that of the climate mean. We develop a novel method for estimating the welfare effects of observed risk preference changes using panel data, and find that the climate-induced changes in risk preferences we observe increased welfare in both Indonesia and Mexico by approximately 1%.

Suggested Citation

  • Wesley Howden & Remy Levin, 2022. "The Global Impacts of Climate Change on Risk Preferences," Working papers 2022-13, University of Connecticut, Department of Economics.
  • Handle: RePEc:uct:uconnp:2022-13
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    File URL: https://media.economics.uconn.edu/working/2022-13.pdf
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    References listed on IDEAS

    as
    1. Ross, Stephen A, 1981. "Some Stronger Measures of Risk Aversion in the Small and the Large with Applications," Econometrica, Econometric Society, vol. 49(3), pages 621-638, May.
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    Cited by:

    1. Björn Bos & Moritz A. Drupp & Jasper N. Meya & Martin F. Quaas, 2023. "Financial Risk-Taking under Health Risk," CESifo Working Paper Series 10387, CESifo.
    2. Kuminoff, Nicolai V. & Mathes, Sophie M., 2024. "Residential sorting, local environments, and human capital," Regional Science and Urban Economics, Elsevier, vol. 107(C).

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    More about this item

    Keywords

    Risk preferences; climate change; experience effects; volatility; welfare;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • I31 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General Welfare, Well-Being
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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