Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/92816
Authors: 
Ikefuji, Masako
Laeven, Roger J. A.
Magnus, Jan R.
Muris, Chris
Year of Publication: 
2011
Series/Report no.: 
ISER Discussion Paper, Institute of Social and Economic Research, Osaka University 825
Abstract: 
We specify a stochastic economy-climate model, adapting Nordhaus' deterministic economy-climate model by allowing for Weitzman-type stochasticity. We show that, under expected power utility, the model is fragile to heavy-tailed distributional assumptions and we derive necessary and sufficient conditions on the utility function to avoid fragility. We solve our stochastic economy-climate model for two cases with compatible pairs of utility functions and heavy-tailed distributional assumptions. We further develop and implement a procedure to learn the input parameters of our model and show that the model thus specified produces robust optimal policies. The numerical results indicate that higher levels of uncertainty lead to less abatement and consumption, and to more investment.
Subjects: 
Economy-climate models
Catastrophe
Expected utility
Heavy tails
Power utility
JEL: 
D61
D81
Q5
Document Type: 
Working Paper

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