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Martin L Weitzman
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Publisher: Journals Gateway
The Review of Economics and Statistics (2009) 91 (1): 1–19.
Published: 01 February 2009
Abstract
View articletitled, On Modeling and Interpreting the Economics of Catastrophic Climate Change
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for article titled, On Modeling and Interpreting the Economics of Catastrophic Climate Change
With climate change as prototype example, this paper analyzes the implications of structural uncertainty for the economics of low-probability, high-impact catastrophes. Even when updated by Bayesian learning, uncertain structural parameters induce a critical “tail fattening” of posterior-predictive distributions. Such fattened tails have strong implications for situations, like climate change, where a catastrophe is theoretically possible because prior knowledge cannot place sufficiently narrow bounds on overall damages. This paper shows that the economic consequences of fat-tailed structural uncertainty (along with unsureness about high-temperature damages) can readily outweigh the effects of discounting in climate-change policy analysis.