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Title:Climate change and the irreversibility effect: combining expected utility and MaxiMin PDF Logo
Authors:Lange, Andreas
Issue Date:2002
Series/Report no.:ZEW Discussion Papers 02-29
Abstract:This paper analyzes decisions on emissions of a stock pollutant under uncertainty in a two period model. Decisions are based on a weighted average of expected utility (EU) and the MaxiMin criterion. I first show that more weight on the worst case (less weight on EU) may lead to increased first period emissions. The effect of learning possibilities on emissions is not clear in general, but depends qualitatively on the weight given to MaxiMin: For the quadratic utility case, considering prospective learning increases today?s abatement effort, i.e. the ?irreversibility effect? holds, if the weight on EU is small. This contrasts standard results on the irreversibility effect for EU which translates to small weights on MaxiMin. There is, however, the possibility of a negative value of learning. It is shown that the irreversibility effect holds if and only if the value of learning is negative. Consequences for the applicability of generalized EU-MaxiMin are discussed.
Subjects:uncertainty
MaxiMin
irreversibility
learning
JEL:H4
D81
D60
Document Type:Working Paper
Appears in Collections:ZEW Discussion Papers
Publikationen von Forscherinnen und Forschern des ZEW

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