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.
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- Weitzman, Martin L., 2009.
"On Modeling and Interpreting the Economics of Catastrophic Climate Change,"
3693423, Harvard University Department of Economics.
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04-03, HEC Montréal, Institut d'économie appliquée.
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IDEI Working Papers
523, Institut d'Économie Industrielle (IDEI), Toulouse.
- repec:cup:cbooks:9780521517324 is not listed on IDEAS
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- 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.
- 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.
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NBER Working Papers
13690, National Bureau of Economic Research, Inc.
- repec:cup:cbooks:9780521741231 is not listed on IDEAS
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