Does Ambiguity Aversion Raise the Optimal Level of Effort? A Two-Period Model

Loïc Berger

Working Papers ECARES from ULB -- Universite Libre de Bruxelles

Abstract: I consider two-period self-insurance and self-protection models in the presence of ambiguity that either affects the loss or the probabilities, and analyze the effect of ambiguity aversion. I show that in most common situations, ambiguity prudence is a sufficient condition to observe an increase in the level of effort. I proposes an interpretation of the model in the context of climate change, such that self-insurance and self-protection are respectively seen as adaptation and mitigation efforts a policymaker should provide to deal with an uncertain catastrophic event, and interpret the results obtained as an expression of the Precautionary Principle.

Keywords: non-expected utility; self-protection; self-insurance; ambiguity prudence; precautionary principle (search for similar items in EconPapers)
JEL-codes: D61 D81 D91 Q58 (search for similar items in EconPapers)
Pages: 35 p.
Date: 2011-08
New Economics Papers: this item is included in nep-cbe, nep-hrm, nep-ias, nep-mic and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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