Choosing between traditional and innovative technologies: the case of scientific uncertainty
We study the choice between a traditional technology characterized by known risks and an innovative technology (a geological storages for nuclear wastes, a genetically modified organism or a new treatment in medical science) subject to scientific uncertainty. We assume that the two technologies differ in first period implementation costs, second period risk, and degree of irreversibility, and we study the effect of foreseen scientific progress on the present choice between the two. If the first-period choice is restricted to be 'all or nothing', scientific progress promotes the traditional technology; with constant absolute risk aversion, scientific progress increases the optimal level of the technology with the higher implementation cost.
|Date of creation:||01 Dec 2001|
|Date of revision:|
|Publication status:||Published as “Uncertainty and the cost of reversal”, in The Geneva Risk and Insurance Review, 30 (2005), pages 119-128|
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- Kenneth J. Arrow & Anthony C. Fisher, 1974. "Environmental Preservation, Uncertainty, and Irreversibility," The Quarterly Journal of Economics, Oxford University Press, vol. 88(2), pages 312-319.
- Henry, Claude, 1974. "Investment Decisions Under Uncertainty: The "Irreversibility Effect."," American Economic Review, American Economic Association, vol. 64(6), pages 1006-12, December.
- Epstein, Larry G, 1980. "Decision Making and the Temporal Resolution of Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 21(2), pages 269-83, June.
- Gollier, Christian & Jullien, Bruno & Treich, Nicolas, 2000. "Scientific progress and irreversibility: an economic interpretation of the 'Precautionary Principle'," Journal of Public Economics, Elsevier, vol. 75(2), pages 229-253, February.
- Robert A. Jones & Joseph M. Ostroy, 1984. "Flexibility and Uncertainty," Review of Economic Studies, Oxford University Press, vol. 51(1), pages 13-32.
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