Acting in the darkness

Louise Guillouet () and David Martimort ()
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Louise Guillouet: International Finance Corporation
David Martimort: Toulouse School of Economics, Department of Economics, Institut Universitaire de France

Theoretical Economics, Forthcoming

Abstract: Environmental decisions involve both irreversibility and uncertainty. We study optimal behavior in a dynamic setting where actions yield a flow payoff but contribute to a stock that, once past an unknown tipping point, raises the probability of an environmental catastrophe. Optimal actions reflect an Irreversibility Effect, present even when the tipping point is known, an Indirect Learning Effect, arising because surviving suggests that the tipping point still lies ahead, and a Fatalism Effect that arises once the decision-maker is almost sure that the tipping point has been passed. We also provide various comparative statics on value functions and feedback rules as the distribution of tipping points varies.

Keywords: Environmental Risk; Tipping Point; Uncertainty; Irreversibility (search for similar items in EconPapers)
JEL-codes: D83 Q55 (search for similar items in EconPapers)
Date: 2026-10-15
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