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Economic policy when models disagree

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  • Pauline Barrieu
  • Bernard Sinclair Desgagne

Abstract

This paper proposes a general way to conceive public policy when there is no consensual account of the situation of interest. The approach builds on an extension and dual formulation of the traditional theory of economic policy. It does not need a representative policymaker’s utility function (as in the literature on ambiguity), a reference model (as in robust control theory) or some prior probability distribution over the set of supplied scenarios (as in Bayesian model-averaging). The method requires instead that the willingness to accept a policy’s projected outcomes coincide with the willingness to pay to correct the current situation. Policies constructed in this manner are shown to be e ective, robust and simple in a precise and intuitive sense.

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File URL: http://eprints.lse.ac.uk/37607/
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Bibliographic Info

Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 37607.

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Length: 29 pages
Date of creation: Dec 2009
Date of revision:
Handle: RePEc:ehl:lserod:37607

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Keywords: model uncertainty; theory of economic policy; ambiguity; robustness;

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