The paper develops an axiomatic framework for rational decision making. The von Neumann-Morgenstern axioms give rise to a richer risk attitude than that captured in the standard discounted expected utility model. I derive three models that permit a more comprehensive risk evaluation. These...

This paper examines the impact of Knightian uncertainty upon optimal climate policy through the prism of a continuous-time real option modelling framework. We analytically determine optimal intertemporal climate policies under ambiguity. Additionally, numerical simulations are provided to...

Uncertainty has an almost negligible impact on project value in the economic standard model. I show that a comprehensive evaluation of uncertainty and uncertainty attitude changes this picture fundamentally. The analysis relies on the discount rate, which is the crucial determinant in balancing...

The possibility of low-probability extreme events has reignited the debate over the optimal intensity and timing of climate policy. In this paper we therefore contribute to the literature by assessing the implications of low-probability extreme events on environmental policy in a continuous-time...

Recent theoretical work in the economics of climate change has suggested that climate policy is highly sensitive to ‘fat-tailed’ risks of catastrophic outcomes (Weitzman, 2009b). Such risks are suggested to be an inevitable consequence of scientific uncertainty about the effects of increased...

We present a simple approach to transform a deterministic numerical model, where several agents simultaneously make decisions, into a stochastic model. This approach, which builds on scenario aggregation, a numerical method developed to solve decision problems under uncertainty, is used to build...

The paper reexamines the welfare economics of intergenerational risk. Risk and its resolution over time are modeled as a decision tree: in each period, the consumption of the current one-period living generation is to be traded-off against uncertain benefits of future generations; as time...

The quintessence of recent natural science studies is that the 2°C target can only be achieved with massive emission reductions in the next few years. The central twist of this paper is the addition of this limited time to act into a non-perpetual real options framework analysing optimal...

So-called activation policies aiming at bringing jobless people into work have been a central component of welfare reforms across OECD countries during the last decades. Such policies combine restrictive and enabling programs, but their characteristic feature is that also enabling programs are...