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Acting in the darkness

Author

Listed:
  • Guillouet, Louise

    (International Finance Corporation)

  • Martimort, David

    (Toulouse School of Economics, Department of Economics, Institut Universitaire de France)

Abstract

Environmental decisions involve both irreversibility and uncertainty. We study optimal behavior in a dynamic setting where actions yield a flow payoff but contribute to a stock that, once past an unknown tipping point, raises the probability of an environmental catastrophe. Optimal actions reflect an Irreversibility Effect, present even when the tipping point is known, an Indirect Learning Effect, arising because surviving suggests that the tipping point still lies ahead, and a Fatalism Effect that arises once the decision-maker is almost sure that the tipping point has been passed. We also provide various comparative statics on value functions and feedback rules as the distribution of tipping points varies.

Suggested Citation

  • Guillouet, Louise & Martimort, David, 0. "Acting in the darkness," Theoretical Economics, Econometric Society.
    • Handle: RePEc:the:publsh:6217
    as

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    More about this item

    Keywords

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    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation

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