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Risk,inequality and time in the welfare economics of climate change: is the workhorse model underspecified?

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Author Info
Hakon Saelen
Giles Atkinson
Simon Dietz
Jennifer Helgeson
Cameron Hepburn

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Abstract

In the workhorse model of welfare economics, the elasticity of marginal utility, often denoted as @#019E, serves simultaneously to represent aversion to risk, aversion to spatial inequality, and preferences for intertemporal substitution. While Kreps-Porteus-Selden and Epstein-Zin preferences enable risk to be separated from intertemporal substitution, no model enables all tlhree concepts to be disentangled. This theoretical lacuna is important, particularly for the economics of climate change, which is a global, long-run, uncertain externality. Much debate, for instance in the wake of the Stern Review (Stern, 2007a) has focused on the appropriate value for @#019E. This paper tests the suitability of the workhorse model for climate change economics, by surveying the attitudes of over 3000 people to risk, time, and income inequality. The results show that individual attitudes to the three are only weakly correlated. This suggests that because the three concepts are captured by a single parameter, the model is underspecified and a richer model should be considered.

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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 400.

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Date of creation: 2008
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Handle: RePEc:oxf:wpaper:400

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Related research
Keywords: Climate Change; Discounting; Cost-Benefit Analysis; Risk Aversion; Intertemporal Substitution; Inequality Aversion; Intergenerational Equity;

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Find related papers by JEL classification:
D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects

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  1. Tol, Richard S. J., 2008. "The Economic Impact of Climate Change," Papers WP255, Economic and Social Research Institute (ESRI). [Downloadable!]
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