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Accounting for Different Uncertainties: Implications for Climate Investments?

  • Svenja Hector()


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    The paper clarifies the link between changes in risk aversion and the effect on the consumption discount rate. In a general framework that can cope with various forms of uncertainty, it is shown that the response of the consumption discount rate to a change in risk aversion depends on some fundamental properties of the considered uncertainties. The application of this general result to specific forms of uncertainty extends existing results to more general forms of risk and yields a new result on preference uncertainty.

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    Paper provided by ETH Zurich, Chair of Systems Design in its series Working Papers with number ETH-RC-13-007.

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    Handle: RePEc:stz:wpaper:eth-rc-13-007
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    1. repec:hal:journl:hal-00267891 is not listed on IDEAS
    2. Kimball, M. & Weil, P., 1991. "Precautionary Savings and Consumption Smoothing Across Time and Possibilities," Harvard Institute of Economic Research Working Papers 1563, Harvard - Institute of Economic Research.
    3. Christian Traeger, 2014. "Why uncertainty matters: discounting under intertemporal risk aversion and ambiguity," Economic Theory, Springer, vol. 56(3), pages 627-664, August.
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    7. Alain Ayong Le Kama, 2012. "Preservation and Endogenous Uncertain Future Preferences," Working Papers 1204, Chaire Economie du Climat.
    8. Minh Ha-Duong & Nicolas Treich, 2004. "Risk aversion, intergenerational equity and climate change," Post-Print halshs-00000680, HAL.
    9. Ravi Bansal & Amir Yaron, 2004. "Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles," Journal of Finance, American Finance Association, vol. 59(4), pages 1481-1509, 08.
    10. Chichilnisky, Graciela & Beltratti, Andrea & Heal, Geoffrey, 1998. "Uncertain future preferences and conservation," MPRA Paper 7912, University Library of Munich, Germany.
    11. Crost, Benjamin & Traeger, Christian P., 2010. "Risk and aversion in the integrated assessment of climate change," CUDARE Working Paper Series 1104R, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy, revised Jul 2011.
    12. Kreps, David M & Porteus, Evan L, 1978. "Temporal Resolution of Uncertainty and Dynamic Choice Theory," Econometrica, Econometric Society, vol. 46(1), pages 185-200, January.
    13. Selden, Larry, 1978. "A New Representation of Preferences over "Certain A Uncertain" Consumption Pairs: The "Ordinal Certainty Equivalent" Hypothesis," Econometrica, Econometric Society, vol. 46(5), pages 1045-60, September.
    14. Le Grand, François & Chassagnon, Arnold & Bommier, Antoine, 2012. "Comparative Risk Aversion: A Formal Approach with Applications to Saving Behaviors," Economics Papers from University Paris Dauphine 123456789/4434, Paris Dauphine University.
    15. Maria Cunha-E-Sá & Clara Costa-Duarte, 2000. "Endogenous Future Preferences and Conservation," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 16(2), pages 253-262, June.
    16. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
    17. Epaulard, Anne & Pommeret, Aude, 2003. "Optimally eating a stochastic cake: a recursive utility approach," Resource and Energy Economics, Elsevier, vol. 25(2), pages 129-139, May.
    18. Keith C. Knapp & Lars J. Olson, 1996. "Dynamic Resource Management: Intertemporal Substitution and Risk Aversion," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(4), pages 1004-1014.
    19. Frank Ackerman & Elizabeth Stanton & Ramón Bueno, 2013. "Epstein–Zin Utility in DICE: Is Risk Aversion Irrelevant to Climate Policy?," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 56(1), pages 73-84, September.
    20. Christian P. Traeger, 2009. "Recent Developments in the Intertemporal Modeling of Uncertainty," Annual Review of Resource Economics, Annual Reviews, vol. 1(1), pages 261-285, 09.
    21. Yongyang Cai & Kenneth L. Judd & Thomas S. Lontzek, 2013. "The Social Cost of Stochastic and Irreversible Climate Change," NBER Working Papers 18704, National Bureau of Economic Research, Inc.
    22. BLEICHRODT, Han & EECKHOUDT, Louis, . "Saving under rank-dependent utility," CORE Discussion Papers RP 1752, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    23. Chew, Soo Hong & Epstein, Larry G., 1990. "Nonexpected utility preferences in a temporal framework with an application to consumption-savings behaviour," Journal of Economic Theory, Elsevier, vol. 50(1), pages 54-81, February.
    24. Kihlstrom, Richard E. & Mirman, Leonard J., 1974. "Risk aversion with many commodities," Journal of Economic Theory, Elsevier, vol. 8(3), pages 361-388, July.
    25. Gollier, Christian, 2002. "Discounting an uncertain future," Journal of Public Economics, Elsevier, vol. 85(2), pages 149-166, August.
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