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Precautionary Effect and Variations of the Value of Information

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  • Laurent Gilotte

    (CIRED)

  • Michel de Lara

    (CERMICS)

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    Abstract

    For a sequential, two-period decision problem with uncertainty and under broad conditions (non-finite sample set, endogenous risk, active learning and stochastic dynamics), a general sufficient condition is provided to compare the optimal initial decisions with or without information arrival in the second period. More generally the condition enables the comparison of optimal decisions related to different information structures. It also ties together and clarifies many conditions for the so-called irreversibility effect that are scattered in the environmental economics literature. A numerical illustration with an integrated assessment model of climate-change economics is provided.

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    Bibliographic Info

    Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2005.28.

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    Date of creation: Feb 2005
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    Handle: RePEc:fem:femwpa:2005.28

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    Keywords: Value of Information; Uncertainty; Irreversibility effect; Climate change;

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    1. Hanemann, W. Michael, 1989. "Information and the concept of option value," Journal of Environmental Economics and Management, Elsevier, vol. 16(1), pages 23-37, January.
    2. Minh Ha-Duong, 1998. "Quasi-option value and climate policy choices," Post-Print halshs-00002457, HAL.
    3. Henry, Claude, 1974. "Investment Decisions Under Uncertainty: The "Irreversibility Effect."," American Economic Review, American Economic Association, vol. 64(6), pages 1006-12, December.
    4. Jean-Charles Hourcade & Philippe Ambrosi & Stéphane Hallegatte & Franck Lecocq & Patrice Dumas & Minh Ha-Duong, 2003. "Optimal control models and elicitation of attitudes towards climate damages," Post-Print halshs-00000966, HAL.
    5. Ulph, Alistair & Ulph, David, 1997. "Global Warming, Irreversibility and Learning," Economic Journal, Royal Economic Society, vol. 107(442), pages 636-50, May.
    6. Conrad, Jon M, 1980. "Quasi-Option Value and the Expected Value of Information," The Quarterly Journal of Economics, MIT Press, vol. 94(4), pages 813-20, June.
    7. Sébastien Rouillon, 2001. "Catastrophe climatique irréversible, incertitude et progrès de la connaissance," Revue Économique, Programme National Persée, vol. 52(1), pages 61-90.
    8. Jon Gjerde & Sverre Grepperud & Snorre Kverndokk, 1998. "Optimal Climate Policy under the Possibility of a Catastrophe," Discussion Papers 209, Research Department of Statistics Norway.
    9. Kolstad, Charles D., 1996. "Fundamental irreversibilities in stock externalities," Journal of Public Economics, Elsevier, vol. 60(2), pages 221-233, May.
    10. Epstein, Larry G, 1980. "Decision Making and the Temporal Resolution of Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 21(2), pages 269-83, June.
    11. Gollier & Jullien & Treich, 2000. "Scientific progress and irreversibility : an economic interpretation of the Precautionary principle," Working Papers 156240, Institut National de la Recherche Agronomique, France.
    12. Kelly, David L. & Kolstad, Charles D., 1999. "Bayesian learning, growth, and pollution," Journal of Economic Dynamics and Control, Elsevier, vol. 23(4), pages 491-518, February.
    13. Arrow, Kenneth J & Fisher, Anthony C, 1974. "Environmental Preservation, Uncertainty, and Irreversibility," The Quarterly Journal of Economics, MIT Press, vol. 88(2), pages 312-19, May.
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