Comments on: But innovation is endogenous, too http://www.ambrosini.us/wordpress/2009/12/but-innovation-is-endogenous-too/ Sharpening my knife Tue, 18 Oct 2011 07:32:30 -0700 http://wordpress.org/?v=2.8.6 hourly 1 By: pushmedia1 http://www.ambrosini.us/wordpress/2009/12/but-innovation-is-endogenous-too/comment-page-1/#comment-8681 pushmedia1 Wed, 30 Dec 2009 04:54:14 +0000 http://www.ambrosini.us/wordpress/?p=1386#comment-8681 Its the observation that mitigating climate change is like insurance that wasn't obvious (at least to all the critics of the Stern report). We don't expect high returns (i.e. high discount rates) from insurance. A standard result in finance is that we buy insurance because it pays off when marginal utility is high (i.e. when consumption is low b/c, for example, your house just burned down). I think Weitzman's results are new because he contemplates uncertain but permanent decreases in payoffs. I wonder what financial economists have to say about the paper. Its the observation that mitigating climate change is like insurance that wasn’t obvious (at least to all the critics of the Stern report). We don’t expect high returns (i.e. high discount rates) from insurance.

A standard result in finance is that we buy insurance because it pays off when marginal utility is high (i.e. when consumption is low b/c, for example, your house just burned down). I think Weitzman’s results are new because he contemplates uncertain but permanent decreases in payoffs. I wonder what financial economists have to say about the paper.

]]> By: jsalvatier http://www.ambrosini.us/wordpress/2009/12/but-innovation-is-endogenous-too/comment-page-1/#comment-8677 jsalvatier Wed, 30 Dec 2009 03:46:23 +0000 http://www.ambrosini.us/wordpress/?p=1386#comment-8677 I thought this point was obvious. Think of dealing with climate change as deciding what level of insurance to buy or how much hedging to do. The more risk averse you are, the more insurance you will buy or the more hedging you will do. The important feature is not that we are discussing "levels of productivity", but that climate change policies are designed to mitigate bad events, where "investments" are normally designed to make good events more likely. You'd pay more now to decrease the chance of losing $100k than to increase the chance of gaining $100k. The higher the probability, the higher the discrepancy. The same goes for climate change. I thought this point was obvious. Think of dealing with climate change as deciding what level of insurance to buy or how much hedging to do. The more risk averse you are, the more insurance you will buy or the more hedging you will do.

The important feature is not that we are discussing “levels of productivity”, but that climate change policies are designed to mitigate bad events, where “investments” are normally designed to make good events more likely. You’d pay more now to decrease the chance of losing $100k than to increase the chance of gaining $100k. The higher the probability, the higher the discrepancy. The same goes for climate change.

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