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Ambiguous Trade-offs: An Application to Climate Change

Author

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  • Nina Boyarchenko

    (Federal Reserve Bank of New York)

  • Marianne Andries

    (Toulouse School of Economics)

Abstract

We study optimal long-term investment choices in settings where agents face ambiguity about both the future benefit and the current cost, as is likely to be the case for large scale social programs, such as healthcare choices and climate change policies. Faced with this kind of ambiguity, rational economic agents optimally choose investment paths that are observationally equivalent to choices made under hyperbolic discounting. Using calibrated paths of potential output losses under different global warming scenarios, we evaluate the relative attractiveness of small-scale, large-scale and R\&D projects for mitigating climate change.

Suggested Citation

  • Nina Boyarchenko & Marianne Andries, 2016. "Ambiguous Trade-offs: An Application to Climate Change," 2016 Meeting Papers 1501, Society for Economic Dynamics.
  • Handle: RePEc:red:sed016:1501
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    References listed on IDEAS

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