Ambiguous tipping points

Derek M Lemoine, Christian P. Traeger

Research output: Contribution to journalArticle

6 Citations (Scopus)

Abstract

We analyze the policy implications of aversion to Knightian uncertainty (ambiguity) about the possibility of tipping points. We demonstrate two channels through which uncertainty aversion affects optimal policy in the general setting. The first channel relates to the policy's effect on the probability of tipping, and the second channel to its differential impact in the pre- and post-tipping regimes. We then extend a recursive dynamic model of climate policy and tipping points to include uncertainty aversion. Numerically, aversion to Knightian uncertainty in the face of an ambiguous tipping point increases the optimal tax on carbon dioxide emissions, but only by a small amount.

Original languageEnglish (US)
JournalJournal of Economic Behavior and Organization
DOIs
StateAccepted/In press - Sep 30 2015

Fingerprint

Knightian uncertainty
Uncertainty aversion
Policy implications
Climate policy
Optimal policy
Carbon dioxide emissions
Optimal tax

Keywords

  • Ambiguity
  • Carbon tax
  • Climate
  • Dynamic programming
  • Hazard
  • Integrated assessment
  • Knightian uncertainty
  • Regime shift
  • Social cost of carbon
  • Threshold
  • Tipping point

ASJC Scopus subject areas

  • Organizational Behavior and Human Resource Management
  • Economics and Econometrics

Cite this

Ambiguous tipping points. / Lemoine, Derek M; Traeger, Christian P.

In: Journal of Economic Behavior and Organization, 30.09.2015.

Research output: Contribution to journalArticle

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