We explore the economic effects of biodiversity loss by developing an ecologically-founded model that captures how different species interact to deliver the ecosystem services that complement other factors of economic production. Aggregate ecosystem services are produced by combining several non-substitutable ecosystem functions such as pollination and water filtration, which are each provided by many substitutable species playing similar roles. As a result, economic output is an increasing but highly concave function of species richness. The marginal economic value of a species depends on three factors: (i) the number of similar species within its ecosystem function, (ii) the marginal importance of the affected function for overall ecosystem productivity, and (iii) the extent to which ecosystem services constrain economic output in each country. Using our framework, we derive expressions for the fragility of ecosystem service provision and its evolution over time, which depends, among other things, on the distribution of biodiversity losses across ecosystem functions. We discuss how these fragility measures can help policymakers assess the risks induced by biodiversity loss and prioritize conservation efforts. We also embed our model of ecosystem service production in a standard economic model to study optimal land use when land use raises output at the cost of reducing biodiversity. We find that even in settings where species loss does not reduce output substantially today, it lowers growth opportunities and reduces resilience to future species loss, especially when past species loss has been asymmetric across functions. Consistent with these predictions of our model, we show empirically that news about biodiversity loss increases spreads on credit default swaps (CDS) more for countries with more depleted ecosystems.
Authors
Stefano Giglio, Theresa Kuchler, Johannes Stroebel, Olivier Wang
- Acknowledgements & Disclosure
- Stefano Giglio, Theresa Kuchler, Johannes Stroebel and Olivier Wang declare that they have no conflicts of interest to disclose. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
- DOI
- https://doi.org/10.3386/w32678
- Pages
- 66
- Published in
- United States of America
Table of Contents
- The Production of Ecosystem Services 9
- Ecosystem Service Production: Insights from the Ecology Literature. 10
- Modeling Approach 12
- Substitutability of Species Within a Function 12
- Complementarity across Functions 16
- Biodiversity and Ecosystem Functioning 17
- The Effect of Species Loss on Aggregate Ecosystem Services 17
- Biodiversity Shocks and the Fragility of Ecosystem Services 20
- Implications for Policy Makers and Beyond 26
- Biodiversity and the Economy 28
- Ecosystem Services as a Factor of Production 28
- Economic Activity and the Dynamics of Biodiversity 31
- The role of across-function imbalances in biodiversity 35
- Targeted land use 37
- Summary of Key Implications 38
- Biodiversity and the Economy: Evidence from Asset Prices 38
- Empirical Approach and Testable Model Implications 39
- Data 39
- Empirical Analysis 42
- Conclusion 45
- Empirical Analysis - Further Details 54
- Details on Data Sources and Sample Construction 54
- Robustness Tests 59
- Theoretical Appendix - Proofs 61
