Ambiguous Trade-offs: An Application to Climate Change

Nina Boyarchenko and Marianne Andries

No 1501, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: We study optimal long-term investment choices in settings where agents face ambiguity about both the future benefit and the current cost, as is likely to be the case for large scale social programs, such as healthcare choices and climate change policies. Faced with this kind of ambiguity, rational economic agents optimally choose investment paths that are observationally equivalent to choices made under hyperbolic discounting. Using calibrated paths of potential output losses under different global warming scenarios, we evaluate the relative attractiveness of small-scale, large-scale and R\&D projects for mitigating climate change.

Date: 2016
New Economics Papers: this item is included in nep-agr and nep-env
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