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

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  • Cameron Hepburn
  • Hakon Sælen
  • Giles Atkinson

Abstract

In the workhorse  model of welfare economics, the elasticity of marginal utility, often denoted as η, 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 η.  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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Bibliographic Info

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: 01 Jul 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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Cited by:
  1. Tol, Richard S. J., 2008. "The Economic Impact of Climate Change," Papers WP255, Economic and Social Research Institute (ESRI).
  2. Anthoff, David, 2009. "Optimal Global Dynamic Carbon Taxation," Papers WP278, Economic and Social Research Institute (ESRI).

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