Ambiguous tipping points

Derek Lemoine, Christian P. Traeger

Research output: Contribution to journalArticle

11 Scopus citations

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)
Pages (from-to)5-18
Number of pages14
JournalJournal of Economic Behavior and Organization
Volume132
DOIs
StatePublished - Dec 1 2016

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

  • Economics and Econometrics
  • Organizational Behavior and Human Resource Management

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