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Accounting for Different Uncertainties: Implications for Climate Investments?

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  • Svenja Hector()

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    Abstract

    The paper clarifies the link between changes in risk aversion and the effect on the consumption discount rate. In a general framework that can cope with various forms of uncertainty, it is shown that the response of the consumption discount rate to a change in risk aversion depends on some fundamental properties of the considered uncertainties. The application of this general result to specific forms of uncertainty extends existing results to more general forms of risk and yields a new result on preference uncertainty.

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    Bibliographic Info

    Paper provided by ETH Zurich, Chair of Systems Design in its series Working Papers with number ETH-RC-13-007.

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    Handle: RePEc:stz:wpaper:eth-rc-13-007

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    Keywords: discount rate; risk aversion; Kreps-Porteus-Selden; Risk-Sensitive preferences; uncertain preferences; climate change;

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    2. Maria Cunha-E-Sá & Clara Costa-Duarte, 2000. "Endogenous Future Preferences and Conservation," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 16(2), pages 253-262, June.
    3. Crost, Benjamin & Traeger, Christian P., 2011. "Risk and aversion in the integrated assessment of climate change," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt1562s275, Department of Agricultural & Resource Economics, UC Berkeley.
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    7. Epaulard, Anne & Pommeret, Aude, 2003. "Optimally eating a stochastic cake: a recursive utility approach," Resource and Energy Economics, Elsevier, vol. 25(2), pages 129-139, May.
    8. Traeger, Christian P., 2012. "Why uncertainty matters - discounting under intertemporal risk aversion and ambiguity," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt2w614303, Department of Agricultural & Resource Economics, UC Berkeley.
    9. Yongyang Cai & Kenneth L. Judd & Thomas S. Lontzek, 2013. "The Social Cost of Stochastic and Irreversible Climate Change," NBER Working Papers 18704, National Bureau of Economic Research, Inc.
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    14. repec:hal:journl:hal-00267891 is not listed on IDEAS
    15. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
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    17. Christian P. Traeger, 2009. "Recent Developments in the Intertemporal Modeling of Uncertainty," Annual Review of Resource Economics, Annual Reviews, vol. 1(1), pages 261-285, 09.
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    19. Alain Ayong Le Kama, 2001. "Preservation and exogenous uncertain future preferences," Economic Theory, Springer, vol. 18(3), pages 745-752.
    20. Kreps, David M & Porteus, Evan L, 1978. "Temporal Resolution of Uncertainty and Dynamic Choice Theory," Econometrica, Econometric Society, vol. 46(1), pages 185-200, January.
    21. Chichilnisky, Graciela & Beltratti, Andrea & Heal, Geoffrey, 1998. "Uncertain future preferences and conservation," MPRA Paper 7912, University Library of Munich, Germany.
    22. Ayong Le Kama, A. & Schubert, K., 1999. "Growth, Environment and Uncertain Future Preferences," Papiers d'Economie Mathématique et Applications 1999.52, Université Panthéon-Sorbonne (Paris 1).
    23. Frank Ackerman & Elizabeth Stanton & Ramón Bueno, 2013. "Epstein–Zin Utility in DICE: Is Risk Aversion Irrelevant to Climate Policy?," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 56(1), pages 73-84, September.
    24. Chew, Soo Hong & Epstein, Larry G., 1990. "Nonexpected utility preferences in a temporal framework with an application to consumption-savings behaviour," Journal of Economic Theory, Elsevier, vol. 50(1), pages 54-81, February.
    25. Kihlstrom, Richard E. & Mirman, Leonard J., 1974. "Risk aversion with many commodities," Journal of Economic Theory, Elsevier, vol. 8(3), pages 361-388, July.
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