1. Option value and precaution
- Author
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Nicolas Treich, Christian Gollier, Economie des Ressources Naturelles (LERNA), Université Toulouse Capitole (UT Capitole), Université de Toulouse (UT)-Université de Toulouse (UT)-Institut National de la Recherche Agronomique (INRA)-Commissariat à l'énergie atomique et aux énergies alternatives (CEA), Institut d'Economie Industrielle (IDEI), Université de Toulouse (UT)-Université de Toulouse (UT), Jason Shogren, Université Toulouse 1 Capitole (UT1), Université Fédérale Toulouse Midi-Pyrénées-Université Fédérale Toulouse Midi-Pyrénées-Institut National de la Recherche Agronomique (INRA)-Commissariat à l'énergie atomique et aux énergies alternatives (CEA), and Université Fédérale Toulouse Midi-Pyrénées-Université Fédérale Toulouse Midi-Pyrénées
- Subjects
media_common.quotation_subject ,expected utility ,scientific uncertainty ,[SHS]Humanities and Social Sciences ,Microeconomics ,information ,High complexity ,0502 economics and business ,Economics ,sequential decisions ,option value ,050207 economics ,Expected utility hypothesis ,050205 econometrics ,media_common ,Precautionary principle ,precautionary principle ,Actuarial science ,Cost–benefit analysis ,future generations ,05 social sciences ,risk aversion ,irreversibility ,Option value ,Uncertainty ,climate change ,cost–benefit analysis ,Intuition - Abstract
International audience; Preserving flexibility has a high value in an uncertain environment. This common wisdom has long been given support from the economic literature through the notion of option value. We interpret the precautionary principle (PP) in the light of this literature on option value. Formally, we examine the impact of incomplete and evolving information on the optimal initial action. Precaution is associated to the intuition that more uncertainty should lead to preserve more flexibility. We show that this intuition is consistent with the ‘irreversibility effect.’ However, such a prescription has a weak economic basis because of the presence of other effects, such as the willingness to transfer more wealth in the face of a more uncertain future. We recognize the high complexity of applying the PP under this approach. We illustrate our analysis for stock pollutant problems, such as the climate change problem. We briefly discuss implementation issues and alternative approaches to the notion of precaution.
- Published
- 2013
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