IDEAS home Printed from
   My bibliography  Save this paper

Precautionary principle and the cost benefit analysis of innovative projects


  • Marc Baudry

    () (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - IEMN-IAE Nantes - Institut d'Économie et de Management de Nantes - Institut d'Administration des Entreprises - Nantes - UN - Université de Nantes)


Public authorities often invoke the precautionary principle to ban or postpone the development of innovative projects with uncertain but potentially harmful irreversible impacts on the environment or health. As stated in the Rio declaration, the precautionary principle suggests balancing costs and benefits associated with irreversible decisions while taking account of the perspective to acquire better but costly information in the future. Though the real option theory seems to be an appropriate tool to deal with the precautionary principle it has two important limits with this respect. First it focuses on Markovian processes rather than on Bayesian learning. Second, it disregards the role of preferences whereas preferences are at the core of the seemingly linked concept of precautionary saving. The article is an attempt to circumvent these two limits. A canonical model of Bayesian real option expressed in terms of intertemporal utility maximisation is presented and solved. The optimal decision rule is discussed in the light of the precautionary principle. It is then shown how to switch consistently to an equivalent problem expressed in terms of costs and benefits.

Suggested Citation

  • Marc Baudry, 2011. "Precautionary principle and the cost benefit analysis of innovative projects," Working Papers hal-00570317, HAL.
  • Handle: RePEc:hal:wpaper:hal-00570317
    Note: View the original document on HAL open archive server:

    Download full text from publisher

    File URL:
    Download Restriction: no


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hal:wpaper:hal-00570317. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CCSD). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.