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A Precautionary Tale of Uncertain Tail Fattening

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  • Martin Weitzman

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Abstract

Suppose that there is a probability density function for how bad things might get, but that the overall rate at which this probability density function slims down to approach zero in the tail is uncertain. The paper shows how a basic precautionary principle of tail fattening could then apply. The worse is the contemplated damage, the more should a decision maker consider the bad tail to be among the relatively fatter-tailed possibilities. A rough numerical example is applied to the uncertain tail distribution of climate sensitivity. Copyright Springer Science+Business Media Dordrecht 2013

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File URL: http://hdl.handle.net/10.1007/s10640-013-9646-y
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Bibliographic Info

Article provided by European Association of Environmental and Resource Economists in its journal Environmental and Resource Economics.

Volume (Year): 55 (2013)
Issue (Month): 2 (June)
Pages: 159-173

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Handle: RePEc:kap:enreec:v:55:y:2013:i:2:p:159-173

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Web page: http://www.springerlink.com/link.asp?id=100263

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Keywords: Climate change; Fat tail; Uncertainty; Catastrophe;

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  1. Antony Millner & Simon Dietz & Geoffrey Heal, 2010. "Ambiguity and climate policy," Grantham Research Institute on Climate Change and the Environment Working Papers, Grantham Research Institute on Climate Change and the Environment 24, Grantham Research Institute on Climate Change and the Environment.
  2. Martin L. Weitzman, 2011. "Fat-Tailed Uncertainty in the Economics of Catastrophic Climate Change," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 5(2), pages 275-292, Summer.
  3. Claude Henry & Marc Henry, 2002. "Formalization and applications of the Precautionary Principle," Working Papers hal-00243001, HAL.
  4. Weitzman, Martin L., 2009. "On Modeling and Interpreting the Economics of Catastrophic Climate Change," Scholarly Articles 3693423, Harvard University Department of Economics.
  5. Johanna Etner & Meglena Jeleva & Jean‐Marc Tallon, 2012. "Decision Theory Under Ambiguity," Journal of Economic Surveys, Wiley Blackwell, vol. 26(2), pages 234-270, 04.
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Cited by:
  1. In Chang Hwang & Richard S.J. Tol & Marjan W. Hofkes, 2013. "Active Learning about Climate Change," Working Paper Series 6513, Department of Economics, University of Sussex.
  2. Max Gillman & Michal Kejak & Michal Pakos, 2014. "Learning about Rare Disasters: Implications for Consumptions and Asset Prices," CEU Working Papers, Department of Economics, Central European University 2014_2, Department of Economics, Central European University.
  3. Max Gillman & Michal Kejak & Michal Pakos, 2014. "Learning about Disaster Risk: Joint Implications for Consumption and Asset Prices," CERGE-EI Working Papers wp507, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  4. Hwang, In Chang, 2014. "Fat-tailed uncertainty and the learning-effect," MPRA Paper 53671, University Library of Munich, Germany.
  5. Hans-Jürgen Nantke & Alfred Endres & Frederik Schaff & Till Requate & Susanne Dröge, 2013. "Scheitern der Reform des Emissionshandels: Verliert Europa die Vorreiterrolle in der Klimapolitik?," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 66(12), pages 03-15, 06.

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