Expected utility and catastrophic risk in a stochastic economy–climate model

Masako Ikefuji, Roger Laeven, Jan Magnus () and Chris Muris

Journal of Econometrics, 2020, vol. 214, issue 1, 110-129

Abstract: We analyze a stochastic dynamic finite-horizon economic model with climate change, in which the social planner faces uncertainty about future climate change and its economic damages. Our model (SDICE*) incorporates, possibly heavy-tailed, stochasticity in Nordhaus’ deterministic DICE model. We develop a regression-based numerical method for solving a general class of dynamic finite-horizon economy–climate models with potentially heavy-tailed uncertainty and general utility functions. We then apply this method to SDICE* and examine the effects of light- and heavy-tailed uncertainty. The results indicate that the effects can be substantial, depending on the nature and extent of the uncertainty and the social planner’s preferences.

Keywords: Economy–climate models; Economy–climate policy; Expected utility; Heavy tails; Uncertainty (search for similar items in EconPapers)
JEL-codes: C1 E2 Q5 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Working Paper: Expected Utility and Catastrophic Risk in a Stochastic Economy-Climate Model (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:214:y:2020:i:1:p:110-129

DOI: 10.1016/j.jeconom.2019.05.007

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