Fair management of social risk

Antoine Bommier, Bruno Lanz () and Stéphane Zuber ()
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Bruno Lanz: Center for International Environmental Studies - Graduate Institute Geneva
Stéphane Zuber: Centre d'Economie de la Sorbonne - Paris School of Economics, https://sites.google.com/site/stephanezubersite/

Documents de travail du Centre d'Economie de la Sorbonne from Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne

Abstract: We study the role of alternative intertemporal preference representations in a model of economic growth, stock pollutant and endogenous risk of catastrophic collapse. We contrast the traditional “discounted utility” model, which assumes risk neutrality with respect to intertemporal utility, with a multiplicative choice model that displays risk aversion in that dimension. First, we show that both representations of preferences can rationalize the same “business as usual” economy for a given interest rate and no pollution externality. Second, once we introduce a collapse risk whose hazard rate is a function of the pollution stock, multiplicative preferences recommend a much more stringent policy response. An illustration in the context of climate change indicates that switching to the multiplicative preference representation has a similar effect, in terms of policy recommendations, as scaling up the schedule of the hazard rate by a factor of 100

Keywords: Environmental policy; climate change; catastrophic risks; risk aversion; discounting (search for similar items in EconPapers)
JEL-codes: D63 D81 D99 Q53 Q54 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2014-03
New Economics Papers: this item is included in nep-env and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:mse:cesdoc:14017

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