Dimitrios Reppas (ICRE8: International Centre for Research on the Environment and the Economy)on Ambiguity and Strategic Interactions in Global Pollution Problems

Speaker:  Dimitrios Reppas - International Centre for Research on the Environment and the Economy
  Wednesday, April 15, 2015 at 12:30 PM Aula C, Palazzo di Economia
The existing literature on pollution and abatement activities of economic decision-makers largely overlooks the fact that many pollutants are characterized by incomplete information and/or inadequate state of science about the hazards associated with them. As a result, there is often lack of consensus among different sources, including different experts, interest groups, media sources, government agencies and regulated industries, about the consequences of these hazards. This paper uses a simple framework to examine the impact of Knightian uncertainty (unknown or non- estimable probabilities) on decisions to pollute and to abate. We consider a strategic interaction between decision-makers in the form of an aggregative game (global pollution problem). We build on the deterministic framework of Andreoni and Levinson (2001), while allowing for uncertainty about the consequences of pollution. The decision-makers' attitude toward uncertainty (ambiguity) is represented in terms of the α-maximin expected-utility (α-MMEU) model. We examine how the optimal abatement expenditures and pollution levels are affected by changes in the decision makers’ wealth, coefficient of ambiguity aversion, and upper and lower probabilities. Our paper delineates the implications of our analysis for climate change policies. 

Programme Director
Marcella Veronesi

External reference
Marcella Veronesi

Publication date
February 2, 2015