Bliss, Catastrophe, and Rational Policy

Kenneth Arrow and Marcel Priebsch ()

Environmental & Resource Economics, 2014, vol. 58, issue 4, 509 pages

Abstract: Lotteries with infinite expected utility are inconsistent with the axioms of expected utility theory. To rule them out, either the set of permissible lotteries must be restricted (to exclude, at a minimum, “fat-tailed” distributions such as that underlying the St. Petersburg Paradox and power laws that are popular in models of climate change), or the utility function must be bounded. This note explores the second approach and proposes a number of tractable specifications leading to utility functions that are bounded both from above and below. This property is intimately related to that of increasing relative risk aversion as first hypothesized by Arrow ( 1965 ). Copyright Springer Science+Business Media Dordrecht 2014

Date: 2014
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DOI: 10.1007/s10640-014-9788-6

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