Risk-taking and economic growth in natural disaster zones

An important determinant of economic growth is the willingness to take measured risks, i.e., entrepreneurship and capital accumulation. But an entrepreneurs could be adversely affected by external risks and economic growth could suffer. For example, does living in areas where there is significant risk from natural disasters matter with respect to economic growth?

Stéphane Hallegatte studies this with a growth model including two types of capital: a general one that can be located anywhere, and a specific ones that has to be located in hazard-prone areas. Hazards destroy part of the latter, but protective investments can reduce the probability of the hazard having consequences. Protection and hazard losses thus make investing in risky areas more expensive. Under fairly general conditions, economic growth then leads to fewer catastrophic events, but they are larger. And comparing this economy to a hazard-free one, the economic surplus is lower but grows faster until both scenarios converge. In the end, living in a hazard zone does not matter, except for preparing oneself for rare, large catastrophes. There is hope, New Orleans.