Weitzman meets Nordhaus: Expected utility and catastrophic risk in a stochastic economy-climate model
We specify a stochastic economy-climate model, adapting Nordhaus' deterministic economy-climate model by allowing for Weitzman-type stochasticity. We show that, under expected power utility, the model is fragile to heavy-tailed distributional assumptions and we derive necessary and sufficient conditions on the utility function to avoid fragility. We solve our stochastic economy-climate model for two cases with compatible pairs of utility functions and heavy-tailed distributional assumptions. We further develop and implement a procedure to learn the input parameters of our model and show that the model thus specified produces robust optimal policies. The numerical results indicate that higher levels of uncertainty lead to less abatement and consumption, and to more investment.
|Date of creation:||Dec 2011|
|Contact details of provider:|| Postal: 6-1 Mihogaoka, Ibaraki, Osaka 567-0047|
Web page: http://www.iser.osaka-u.ac.jp/index-e.html
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Peter C. Fishburn, 1976. "Unbounded Utility Functions in Expected Utility Theory," The Quarterly Journal of Economics, Oxford University Press, vol. 90(1), pages 163-168.
- Marco Moscadelli, 2004. "The modelling of operational risk: experience with the analysis of the data collected by the Basel Committee," Temi di discussione (Economic working papers) 517, Bank of Italy, Economic Research and International Relations Area.
- Alan Manne & Richard Richels, 1992. "Buying Greenhouse Insurance: The Economic Costs of CO2 Emission Limits," MIT Press Books, The MIT Press, edition 1, volume 1, number 026213280x, January.
- Geweke, John, 2001. "A note on some limitations of CRRA utility," Economics Letters, Elsevier, vol. 71(3), pages 341-345, June.
- Terence M. Ryan, 1974. "The Use of Unbounded Utility Functions in Expected-Utility Maximization: Comment," The Quarterly Journal of Economics, Oxford University Press, vol. 88(1), pages 133-135.
- Gollier, Christian, 2002. "Time Horizon and the Discount Rate," Journal of Economic Theory, Elsevier, vol. 107(2), pages 463-473, December.
- Kelly, David L. & Kolstad, Charles D., 1999. "Bayesian learning, growth, and pollution," Journal of Economic Dynamics and Control, Elsevier, vol. 23(4), pages 491-518, February.
- Christian Gollier, 2008.
"Discounting with fat-tailed economic growth,"
Journal of Risk and Uncertainty,
Springer, vol. 37(2), pages 171-186, December.
- Gollier, Christian, 2008. "Discounting with Fat-Tailed Economic Growth," IDEI Working Papers 523, Institut d'Économie Industrielle (IDEI), Toulouse.
- GOLLIER Christian, 2008. "Discounting with fat-tailed economic growth," LERNA Working Papers 08.19.263, LERNA, University of Toulouse.
- Ackerman, Frank & Stanton, Elizabeth A. & Bueno, Ramón, 2010. "Fat tails, exponents, extreme uncertainty: Simulating catastrophe in DICE," Ecological Economics, Elsevier, vol. 69(8), pages 1657-1665, June.
- Robert J. Barro, 2009. "Rare Disasters, Asset Prices, and Welfare Costs," American Economic Review, American Economic Association, vol. 99(1), pages 243-264, March.
- Roughgarden, Tim & Schneider, Stephen H., 1999. "Climate change policy: quantifying uncertainties for damages and optimal carbon taxes," Energy Policy, Elsevier, vol. 27(7), pages 415-429, July.
- Kenneth J. Arrow, 1974. "The Use of Unbounded Utility Functions in Expected-Utility Maximization: Response," The Quarterly Journal of Economics, Oxford University Press, vol. 88(1), pages 136-138.
- Leach, Andrew J., 2007. "The climate change learning curve," Journal of Economic Dynamics and Control, Elsevier, vol. 31(5), pages 1728-1752, May.
- Andrew J. Leach, 2004. "The Climate Change Learning Curve," Cahiers de recherche 04-03, HEC Montréal, Institut d'économie appliquée.
- Martin L. Weitzman, 2009. "On Modeling and Interpreting the Economics of Catastrophic Climate Change," The Review of Economics and Statistics, MIT Press, vol. 91(1), pages 1-19, February.
- Weitzman, Martin L., 2009. "On Modeling and Interpreting the Economics of Catastrophic Climate Change," Scholarly Articles 3693423, Harvard University Department of Economics.
- Keller, Klaus & Bolker, Benjamin M. & Bradford, D.F.David F., 2004. "Uncertain climate thresholds and optimal economic growth," Journal of Environmental Economics and Management, Elsevier, vol. 48(1), pages 723-741, July.
- Gilboa,Itzhak, 2009. "Theory of Decision under Uncertainty," Cambridge Books, Cambridge University Press, number 9780521741231, December.
- Gilboa,Itzhak, 2009. "Theory of Decision under Uncertainty," Cambridge Books, Cambridge University Press, number 9780521517324.
- Christopher A. Sims, 2001. "Pitfalls of a Minimax Approach to Model Uncertainty," American Economic Review, American Economic Association, vol. 91(2), pages 51-54, May. Full references (including those not matched with items on IDEAS)