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Ambiguous tipping points

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  • Lemoine, Derek
  • Traeger, Christian P.

Abstract

We analyze the policy implications of aversion to Knightian uncertainty (ambiguity) about the possibility of tipping points. We demonstrate two channels through which uncertainty aversion affects optimal policy in the general setting. The first channel relates to the policy's effect on the probability of tipping, and the second channel to its differential impact in the pre- and post-tipping regimes. We then extend a recursive dynamic model of climate policy and tipping points to include uncertainty aversion. Numerically, aversion to Knightian uncertainty in the face of an ambiguous tipping point increases the optimal tax on carbon dioxide emissions, but only by a small amount.

Suggested Citation

  • Lemoine, Derek & Traeger, Christian P., 2016. "Ambiguous tipping points," Journal of Economic Behavior & Organization, Elsevier, vol. 132(PB), pages 5-18.
  • Handle: RePEc:eee:jeborg:v:132:y:2016:i:pb:p:5-18
    DOI: 10.1016/j.jebo.2016.03.009
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    Cited by:

    1. repec:eee:resene:v:48:y:2017:i:c:p:42-54 is not listed on IDEAS
    2. Loic Berger & Massimo Marinacci, 2017. "Model Uncertainty in Climate Change Economics," Working Papers 616, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    3. Geoffrey Heal, Anthony Millner, 2017. "Uncertainty and ambiguity in environmental economics: conceptual issues," GRI Working Papers 278, Grantham Research Institute on Climate Change and the Environment.

    More about this item

    Keywords

    Tipping point; Ambiguity; Knightian uncertainty; Threshold; Regime shift; Climate; Hazard; Integrated assessment; Dynamic programming; Social cost of carbon; Carbon tax;

    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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