Barro, Robert2009-08-252006Barro, Robert. 2006. On the welfare costs of consumption uncertainty. NBER Working Paper 12763.0898-2937http://nrs.harvard.edu/urn-3:HUL.InstRepos:3224745Satisfactory 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.en-US10.3386/w12763