Does Ambiguity Aversion Raise the Optimal Level of Effort? A Two-Period Model
AbstractI consider two-period self-insurance and self-protection models in the presence of ambiguity that either affects the loss or the probabilities, and analyze the effect of ambiguity aversion. I show that in most common situations, ambiguity prudence is a sufficient condition to observe an increase in the level of effort. I proposes an interpretation of the model in the context of climate change, such that self-insurance and self-protection are respectively seen as adaptation and mitigation efforts a policymaker should provide to deal with an uncertain catastrophic event, and interpret the results obtained as an expression of the Precautionary Principle.
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Bibliographic InfoPaper provided by ULB -- Universite Libre de Bruxelles in its series Working Papers ECARES with number ECARES 2011-021.
Length: 35 p.
Date of creation: Aug 2011
Date of revision:
Publication status: Published by:
non-expected utility; self-protection; self-insurance; ambiguity prudence; precautionary principle;
Find related papers by JEL classification:
- D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
- Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-09-05 (All new papers)
- NEP-CBE-2011-09-05 (Cognitive & Behavioural Economics)
- NEP-HRM-2011-09-05 (Human Capital & Human Resource Management)
- NEP-IAS-2011-09-05 (Insurance Economics)
- NEP-MIC-2011-09-05 (Microeconomics)
- NEP-UPT-2011-09-05 (Utility Models & Prospect Theory)
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