Ambiguity,reasoned determination,and climate-change policy |
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| Institution: | 1. University of Maryland, College Park, United States;2. University of Warwick, United Kingdom;1. University of Oldenburg, Department of Economics and Law, 26111 Oldenburg, Germany;2. University of Vienna, Center of Business Studies, Brünnerstr. 72, 1210 Wien, Austria;1. University of Bonn, Department of Economics, Adenauerallee 24-42, D-53113 Bonn, Germany;2. Victoria University of Wellington, School of Economics and Finance, 23 Lambton Quay (Pipitea Campus), Wellington, New Zealand;3. Karlsruhe Institute of Technology, Institute of Management, Chair of Human Resource Management, Kaiserstr. 89, 76133 Karlsruhe, Germany;1. Department of Economics, Universidad Carlos III, Calle Madrid 126, 28903, Getafe, Spain;2. Department of Economics, Duke University, Box 90097, Durham, NC 27708, USA;1. INSEAD, Boulevard de Constance, 77305 Fontainebleau Cedex, France;2. Department of Psychology, Fordham University, Dealy Hall, Bronx, NY 10458, USA |
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| Abstract: | This paper examines climate-change benefit-cost analysis in the presence of scientific uncertainty in the form of ambiguity. The specific issue addressed is the robustness of benefit-cost analyses of climate-change policy alternatives to relaxation of Savage's original axioms. Two alternatives to subjective expected utility (SEU) are considered: maximin expected utility (MEU) and incomplete expected utility (IEU). Among other results, it is demonstrated that polar opposite recommendations can emerge in an ambiguous decision setting even if all agree on Society's rate of time preference, Society's risk attitudes, the degree of ambiguity faced, and the scientific primitives. We show that, for a simple numerical simulation of our model, an MEU decision maker favors policies which immediately tackle climate change while an IEU decision prefers “business as usual”.“Each agency shall assess the costs and benefits of the intended regulation, and recognizing that some costs and benefits are difficult to quantify, propose or adopt a regulation only upon a reasoned determination that the benefits of the intended regulation justify its cost.” Executive Order 12866 of the US President. |
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| Keywords: | Climate change Ambiguity Maximin expected utility Incomplete expected utility |
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