Finance Professor Steven Baker, along with co-authors Burton Hollifield of Carnegie Mellon’s Tepper School of Business and Emilio Osambela of the Federal Reserve Board, recently won The Review of Asset Pricing Studies’ Best Paper Award for 2021 for their work “Preventing Controversial Catastrophes.” The three earned a $10,000 prize.
Their research measures agents’ willingness to pay (WTP) for disaster-reduction policies in the face of disagreement about the likelihood of such events (e.g., climate change) and suggests that costly policies might be enacted only after a disaster happens.
“Our model illustrates a central tension in the demand for such disaster-reduction policies,” they write, noting that disagreement may reduce WTP to eliminate disasters by as much as 40%, but that disagreement creates “valuable private insurance market opportunities, which transfer risk to those most willing to bear it.”
Baker and his colleagues believe that they may be the first researchers to highlight the tradeoff that stands to interest policy makers. They add that their novel approach underscores “the quantitative importance of financial markets as a vehicle for crowding out disaster insurance offered by governments.”
At the Commerce School, Baker studies how financial market participants interact through trade to determine asset prices. Much of his work applies to crude oil markets or to economies where participants disagree about how markets are likely to behave.