Spaces for agreement: a theory of time-stochastic dominance and an application to climate change

Simon Dietz and Nicoleta Matei

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Many investments involve both a long time-horizon and risky returns. Making investment decisions thus requires assumptions about time and risk preferences. Such assumptions are frequently contested, particularly in the public sector, and there is no immediate prospect of universal agreement. Motivated by these observations, we develop a theory and method of finding ‘spaces for agreement’. These are combinations of classes of discount and utility function, for which one investment dominates another (or ‘almost’ does so), so that all decision-makers whose preferences can be represented by such combinations would agree on the option to be chosen. The theory is built on combining the insights of stochastic dominance on the one hand, and time dominance on the other, thus offering a nonparametric approach to inter-temporal, risky choice. We go on to apply the theory to the controversy over climate policy evaluation and show with the help of a popular simulation model that, in fact, even tough carbon emissions targets would be chosen by almost everyone, barring those with arguably ‘extreme’ preferences.

Keywords: almost stochastic dominance; climate change; discounting; integrated assessment; project appraisal; risk aversion; stochastic dominance; time dominance; time-stochastic dominance (search for similar items in EconPapers)
JEL-codes: D61 H43 Q54 (search for similar items in EconPapers)
Date: 2016-03-01
New Economics Papers: this item is included in nep-ene, nep-env, nep-ore and nep-upt
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Citations: View citations in EconPapers (4)

Published in Journal of the Association of Environmental and Resource Economists, 1, March, 2016, 3(1), pp. 85 - 130. ISSN: 2333-5955

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Related works:
Journal Article: Spaces for Agreement: A Theory of Time-Stochastic Dominance and an Application to Climate Change (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:64182

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