Nothing Special   »   [go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/15266.html
   My bibliography  Save this paper

Precaution, Information and Time-Inconsistency: On The Value of the Precautionary Principle

Author

Listed:
  • Martimort, David
  • Guillouet, Louise
Abstract
The Precautionary Principle is a controversial policy instrument, often criticized for stifling innovation and growth. In this paper, we introduce a model of risky technology reflecting real-life situations where policymakers have called for and sometimes implemented the Precautionary Principle. We define this Principle as an institutional cap on actions that cannot be adjusted for a fixed period of time and ask whether it is valuable, and under which circumstances, to impose such cap. If he starts using the technology, a decision-maker faces the possibility of an irreversible catastrophe, an event that follows a non-homogeneous Poisson process with a rate that depends on the stock of past actions. Passed a tipping point, the rate increases. We describe optimal trajectories under different degrees of knowledge on the tipping point. When the mere fact of having passed the tipping point is immediately known, the optimal action plan is time-consistent, and the Precautionary Principle is irrelevant. When having passed the tipping point remains unknown, a scenario of deep uncertainty, a time-inconsistency problem arises. We characterize both the commitment solution and a Stock-Markov Equilibrium such that the decision-maker uses at any point in time a feedback rule that depends only on the existing stock of past actions. Imposing a Precautionary Principle at the beginning of the period can improve commitment. We prove that such a restriction is optimal when passing the tipping point is unlikely to happen early on, a scenario that would lead decision-makers to increase action levels too quickly.

Suggested Citation

  • Martimort, David & Guillouet, Louise, 2020. "Precaution, Information and Time-Inconsistency: On The Value of the Precautionary Principle," CEPR Discussion Papers 15266, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:15266
    as

    Download full text from publisher

    File URL: https://cepr.org/publications/DP15266
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Marina Halac & Pierre Yared, 2014. "Fiscal Rules and Discretion Under Persistent Shocks," Econometrica, Econometric Society, vol. 82, pages 1557-1614, September.
    2. Karp, Larry, 2007. "Non-constant discounting in continuous time," Journal of Economic Theory, Elsevier, vol. 132(1), pages 557-568, January.
    3. R. H. Strotz, 1955. "Myopia and Inconsistency in Dynamic Utility Maximization," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 23(3), pages 165-180.
    4. Giovanni Immordino, 2005. "Uncertainty and the Cost of Reversal," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 30(2), pages 119-128, December.
    5. Glenn C. Loury, 1978. "The Optimal Exploitation of an Unknown Reserve," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 45(3), pages 621-636.
    6. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
    7. Harris, Christopher & Laibson, David, 2001. "Dynamic Choices of Hyperbolic Consumers," Econometrica, Econometric Society, vol. 69(4), pages 935-957, July.
    8. Acemoglu, Daron & Golosov, Mikhail & Tsyvinski, Aleh, 2011. "Power fluctuations and political economy," Journal of Economic Theory, Elsevier, vol. 146(3), pages 1009-1041, May.
    9. Tsur, Yacov & Zemel, Amos, 1996. "Accounting for global warming risks: Resource management under event uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 20(6-7), pages 1289-1305.
    10. Gollier, Christian & Jullien, Bruno & Treich, Nicolas, 2000. "Scientific progress and irreversibility: an economic interpretation of the 'Precautionary Principle'," Journal of Public Economics, Elsevier, vol. 75(2), pages 229-253, February.
    11. Kenneth J. Arrow & Anthony C. Fisher, 1974. "Environmental Preservation, Uncertainty, and Irreversibility," Palgrave Macmillan Books, in: Chennat Gopalakrishnan (ed.), Classic Papers in Natural Resource Economics, chapter 4, pages 76-84, Palgrave Macmillan.
    12. Ulph, Alistair & Ulph, David, 1997. "Global Warming, Irreversibility and Learning," Economic Journal, Royal Economic Society, vol. 107(442), pages 636-650, May.
    13. Claude Henry, 1974. "Investment decisions under uncertainty: The "irreversibility effect"," ULB Institutional Repository 2013/327343, ULB -- Universite Libre de Bruxelles.
    14. Graciela Chichilnisky & Geoffrey Heal, 1993. "Global Environmental Risks," Journal of Economic Perspectives, American Economic Association, vol. 7(4), pages 65-86, Fall.
    15. Epstein, Larry G, 1980. "Decision Making and the Temporal Resolution of Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 21(2), pages 269-283, June.
    16. Robert A. Jones & Joseph M. Ostroy, 1984. "Flexibility and Uncertainty," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(1), pages 13-32.
    17. Giovanni Immordino, 2003. "Looking for a Guide to Protect the Environment: The Development of the Precautionary Principle," Journal of Economic Surveys, Wiley Blackwell, vol. 17(5), pages 629-644, December.
    18. Henry, Claude, 1974. "Investment Decisions Under Uncertainty: The "Irreversibility Effect."," American Economic Review, American Economic Association, vol. 64(6), pages 1006-1012, December.
    19. Juan D. Carrillo & Thomas Mariotti, 2000. "Strategic Ignorance as a Self-Disciplining Device," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 67(3), pages 529-544.
    20. Kolstad, Charles D., 1996. "Fundamental irreversibilities in stock externalities," Journal of Public Economics, Elsevier, vol. 60(2), pages 221-233, May.
    21. Ekeland, Ivar & Karp, Larry & Sumaila, Rashid, 2015. "Equilibrium resource management with altruistic overlapping generations," Journal of Environmental Economics and Management, Elsevier, vol. 70(C), pages 1-16.
    22. Karp, Larry, 2005. "Global warming and hyperbolic discounting," Journal of Public Economics, Elsevier, vol. 89(2-3), pages 261-282, February.
    23. Martimort, David & Semenov, Aggey, 2006. "Continuity in mechanism design without transfers," Economics Letters, Elsevier, vol. 93(2), pages 182-189, November.
    24. Chichilnisky, Graciela & Heal, Geoffrey & Beltratti, Andrea, 1995. "The Green Golden Rule," Economics Letters, Elsevier, vol. 49(2), pages 175-179, August.
    25. Miller, Jon R & Lad, Frank, 1984. "Flexibility, learning, and irreversibility in environmental decisions: A bayesian approach," Journal of Environmental Economics and Management, Elsevier, vol. 11(2), pages 161-172, June.
    26. Manuel Amador & Kyle Bagwell, 2013. "The Theory of Optimal Delegation With an Application to Tariff Caps," Econometrica, Econometric Society, vol. 81(4), pages 1541-1599, July.
    27. David Laibson, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(2), pages 443-478.
    28. Giovanni Immordino, 2000. "Self-Protection, Information and the Precautionary Principle," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 25(2), pages 179-187, December.
    29. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Guillouet, Louise & Martimort, David, 2023. "Acting in the Darkness: Towards some Foundations for the Precautionary Principle," TSE Working Papers 23-1411, Toulouse School of Economics (TSE), revised Jul 2024.
    2. Courbage, Christophe & Rey, Béatrice & Treich, Nicolas, 2013. "Prevention and precaution," TSE Working Papers 13-445, Toulouse School of Economics (TSE).
    3. Karp, Larry & Zhang, Jiangfeng, 2006. "Regulation with anticipated learning about environmental damages," Journal of Environmental Economics and Management, Elsevier, vol. 51(3), pages 259-279, May.
    4. Narain, Urvashi & Hanemann, W. Michael & Fisher, Anthony C., 2004. "The Temporal Resolution of Uncertainty and the Irreversibility Effect," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt7nn328qg, Department of Agricultural & Resource Economics, UC Berkeley.
    5. Narain, Urvashi & Hanemann, W. Michael & Fisher, Anthony C, 2007. "The irreversibility effect in environmental decisionmaking," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt7bc5t8cf, Department of Agricultural & Resource Economics, UC Berkeley.
    6. May Elsayyad & Florian Morath, 2016. "Technology Transfers For Climate Change," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57(3), pages 1057-1084, August.
    7. Giovanni Immordino, 2003. "Looking for a Guide to Protect the Environment: The Development of the Precautionary Principle," Journal of Economic Surveys, Wiley Blackwell, vol. 17(5), pages 629-644, December.
    8. Meglena Jeleva & Stéphane Rossignol, 2019. "Optimists, Pessimists, and the Precautionary Principle," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 74(1), pages 367-396, September.
    9. Ingham, Alan & Ma, Jie & Ulph, Alistair, 2007. "Climate change, mitigation and adaptation with uncertainty and learning," Energy Policy, Elsevier, vol. 35(11), pages 5354-5369, November.
    10. Narain, Urvashi & Hanemann, Michael & Fisher, Anthony C., 2002. "Uncertainty, Learning, and the Irreversibility Effect," CUDARE Working Papers 198691, University of California, Berkeley, Department of Agricultural and Resource Economics.
    11. LANGE Andreas & TREICH Nicolas, 2007. "Uncertainty, Learning and Ambiguity in Economic Models on Climate Policy: Some Classical Results and New Directions," LERNA Working Papers 07.16.237, LERNA, University of Toulouse.
    12. Gollier, Christian & Jullien, Bruno & Treich, Nicolas, 2000. "Scientific progress and irreversibility: an economic interpretation of the 'Precautionary Principle'," Journal of Public Economics, Elsevier, vol. 75(2), pages 229-253, February.
    13. Robert S. Pindyck, 2006. "Uncertainty In Environmental Economics," NBER Working Papers 12752, National Bureau of Economic Research, Inc.
    14. Salanié, François & Treich, Nicolas, 2009. "Option Value and Flexibility: A General Theorem with Applications," TSE Working Papers 09-002, Toulouse School of Economics (TSE).
    15. Claude Henry & Marc Henry, 2002. "Formalization and applications of the Precautionary Principle," Working Papers hal-00243001, HAL.
    16. Attanasi, Giuseppe Marco & Montesano, Aldo, 2010. "Testing Value vs Waiting Value in Environmental Decisions under Uncertainty," TSE Working Papers 10-154, Toulouse School of Economics (TSE).
    17. Giovanni Immordino, 2005. "Uncertainty and the Cost of Reversal," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 30(2), pages 119-128, December.
    18. van den Bergh, Jeroen C.J.M., 2008. "Optimal diversity: Increasing returns versus recombinant innovation," Journal of Economic Behavior & Organization, Elsevier, vol. 68(3-4), pages 565-580, December.
    19. Charles Kolstad & Alistair Ulph, 2011. "Uncertainty, Learning and Heterogeneity in International Environmental Agreements," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 50(3), pages 389-403, November.
    20. Lontzek, Thomas S. & Narita, Daiju, 2009. "The effect of uncertainty on decision making about climate change mitigation: a numerical approach of stochastic control," Kiel Working Papers 1539, Kiel Institute for the World Economy (IfW Kiel).

    More about this item

    Keywords

    Precautionary principle; Regulation; Environmental risk; Tipping point; Uncertainty; Time inconsistency; Functional and differential equations;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:15266. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://www.cepr.org .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.