Modeling the interaction between flooding events and economic growth

Grames, J., Prskawetz, A., Grass, D., Viglione, A., & Blöschl, G. (2016). Modeling the interaction between flooding events and economic growth. Ecological Economics 129 193-209. 10.1016/j.ecolecon.2016.06.014.

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Abstract

Recently socio-hydrology models have been proposed to analyze the interplay of community risk-coping culture, flooding damage and economic growth. These models descriptively explain the feedbacks between socio-economic development and natural disasters such as floods. Complementary to these descriptive models, we develop a dynamic optimization model, where the inter-temporal decision of an economic agent interacts with the hydrological system. We assume a standard macro-economic growth model where agents derive utility from consumption and output depends on physical capital that can be accumulated through investment. To this framework we add the occurrence of flooding events which will destroy part of the capital. We identify two specific periodic long term solutions and denote them rich and poor economies. Whereas rich economies can afford to invest in flood defense and therefore avoid flood damage and develop high living standards, poor economies prefer consumption instead of investing in flood defense capital and end up facing flood damages every time the water level rises like e.g. the Mekong delta. Nevertheless, they manage to sustain at least a low level of physical capital. We identify optimal investment strategies and compare simulations with more frequent, more intense and stochastic high water level events.

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