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Publication - Dr Chris Muris

    Expected utility and catastrophic risk in a stochastic economy-climate model

    Citation

    Ikefuji, M, Laeven, R, Magnus, J & Muris, C, 2019, ‘Expected utility and catastrophic risk in a stochastic economy-climate model’. Journal of Econometrics.

    Abstract

    We analyze a stochastic dynamic finite-horizon economic model with climate change, in which the social planner faces uncertainty about future climate change and its economic damages. Our model (SDICE*) incorporates, possibly heavy-tailed, stochasticity in Nordhaus’ deterministic DICE model. We develop a regression-based numerical method for solving a general class of dynamic finite-horizon economy-climate models with potentially heavy-tailed uncertainty and general utility functions. We then apply this method to SDICE* and examine the effects of light- and heavy-tailed uncertainty. The results indicate that the effects can be substantial, depending on the nature and extent of the uncertainty and the social planner’s preferences.

    Full details in the University publications repository