Precaution, Information and Time-Inconsistency: On The Value of the Precautionary Principle

David Martimort and Louise Guillouet

No 15266, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The Precautionary Principle is a controversial policy instrument, often criticized for stifling innovation and growth. In this paper, we introduce a model of risky technology reflecting real-life situations where policymakers have called for and sometimes implemented the Precautionary Principle. We define this Principle as an institutional cap on actions that cannot be adjusted for a fixed period of time and ask whether it is valuable, and under which circumstances, to impose such cap. If he starts using the technology, a decision-maker faces the possibility of an irreversible catastrophe, an event that follows a non-homogeneous Poisson process with a rate that depends on the stock of past actions. Passed a tipping point, the rate increases. We describe optimal trajectories under different degrees of knowledge on the tipping point. When the mere fact of having passed the tipping point is immediately known, the optimal action plan is time-consistent, and the Precautionary Principle is irrelevant. When having passed the tipping point remains unknown, a scenario of deep uncertainty, a time-inconsistency problem arises. We characterize both the commitment solution and a Stock-Markov Equilibrium such that the decision-maker uses at any point in time a feedback rule that depends only on the existing stock of past actions. Imposing a Precautionary Principle at the beginning of the period can improve commitment. We prove that such a restriction is optimal when passing the tipping point is unlikely to happen early on, a scenario that would lead decision-makers to increase action levels too quickly.

Keywords: Precautionary principle; Regulation; Environmental risk; Tipping point; Uncertainty; Time inconsistency; Functional and differential equations (search for similar items in EconPapers)
JEL-codes: D83 Q55 (search for similar items in EconPapers)
Date: 2020-09
New Economics Papers: this item is included in nep-env and nep-mic
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