Friday, December 15, 2006

How much would Israelis be willing to pay to have peace?

Israelis are news junkies. On the half hour they hear the "hourly news update". This morning I was greeted with "Another two Kassam rockets landed in Shderoth…" Acts of war and terrorism are a daily topic of discussion here.

Following Robert Barro's new paper [On the Welfare Costs of Consumption Uncertainty, by Robert J. Barro, NBER WP 12763, December 2006] I am wondering how much Israelis would be willing to pay to live in the peaceful environment of small town Canada or the USA.

Barro claims in the abstract of the paper that:

Satisfactory calculations of the welfare cost of aggregate consumption uncertainty require a framework that replicates major features of asset prices and returns, such as the high equity premium and low risk-free rate. A Lucas-tree model with rare but large disasters is such a framework. In a baseline simulation, the welfare cost of disaster risk is large -- society would be willing to lower real GDP by about 20% each year to eliminate all disaster risk, including wars. In contrast, the welfare cost from usual economic fluctuations is much smaller, though still important -- corresponding to lowering GDP by around 1.5% each year.

On the one hand, 20% of GDP per year sounds like a lot of money. On the other hand, my intuition says that Israelis would be willing to part with much more. Obviously there are culturally determined differences in the willingness to pay for certainty of peace.

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