Models-as-usual for unusual risks?
We study the role of alternative intertemporal preference representations in a model of economic growth, stock pollutant and endogenous risk of catastrophic collapse. We contrast the traditional “discounted utility” model, which assumes risk neutrality with respect to intertemporal utility, with a multiplicative choice model that displays risk aversion in that dimension. First, we show that both representations of preferences can rationalize the same “business as usual” economy for a given interest rate and no pollution externality. Second, once we introduce a collapse risk whose hazard rate is a function of the pollution stock, multiplicative preferences recommend a much more stringent policy response. An Illustration in the context of climate change indicates that switching to the multiplicative Preference representation has a similar effect, in terms of policy recommendations, as scaling up the schedule of the hazard rate by a factor of 100 Show more
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Journal / seriesCIES research paper
PublisherCentre for International Environmental Studies (CIES)
SubjectEnvironmental policy; Climate change; Catastrophic risks; Risk aversion; Discounting
Organisational unit03877 - Bommier, Antoine
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