I calibrate a Multiple‐Risk Susceptible–Infected–Recovered model on the covid pandemic to analyze the impact of the age‐specific confinement and polymerase chain reaction (PCR) testing policies on ...incomes and mortality. Two polar strategies emerge as potentially optimal. The suppression policy would crush the curve by confining 90% of the population for 4 months to eradicate the virus. The flatten‐the‐curve policy would reduce the confinement to 30% of the population for 5 months, followed by almost 1 year of free circulation of the virus to attain herd immunity without overwhelming hospitals. Both strategies yield a total cost of around 15% of annual gross domestic product (GDP) when combining the economic cost of confinement with the value of lives lost. I show that hesitating between the two strategies can have a huge societal cost, in particular if the suppression policy is stopped too early. Because seniors are much more vulnerable, a simple recommendation emerges to shelter them as one deconfines young and middle‐aged people to build our collective herd immunity. By doing so, one reduces the death toll of the pandemic together with the economic cost of the confinement, and the total cost is divided by a factor 2. I also show that expanding the mass testing capacity to screen people sent back to work has a large benefit under various scenarios. This analysis is highly dependent upon deeply uncertain epidemiologic, sociological, economic, and ethical parameters.
This paper investigates the comparative statics of "more ambiguity aversion" as defined by Klibanoff, Marinacci and Mukerji (2005, "A Smooth Model of Decision Making under Ambiguity", Econometrica, ...73 (6), 1849-1892). The analysis uses the static two-asset portfolio problem with one safe asset and one uncertain one. While it is intuitive that more ambiguity aversion would reduce demand for the uncertain asset, this is not necessarily the case. We derive sufficient conditions for a reduction in the demand for the uncertain asset and for an increase in the equity premium. An example that meets the sufficient conditions is when the set of plausible distributions for returns on the uncertain asset can be ranked according to their monotone likelihood ratio. It is also shown how ambiguity aversion distorts the price kernel in the alternative portfolio problem with complete markets for contingent claims.
Pricing the planet's future Gollier, Christian; Gollier, Christian
2012., 20121111, 2012, 2013-01-01, 20130101
eBook
Our path of economic development has generated a growing list of environmental problems including the disposal of nuclear waste, exhaustion of natural resources, loss of biodiversity, climate change, ...and polluted land, air, and water. All these environmental problems raise the crucial challenge of determining what we should and should not do for future generations. It is also central to other policy debates, including, for example, the appropriate level of public debt, investment in public infrastructure, investment in education, and the level of funding for pension benefits and for research and development. Today, the judge, the citizen, the politician, and the entrepreneur are concerned with the sustainability of our development. The objective ofPricing the Planet's Futureis to provide a simple framework to organize the debate on what we should do for the future.
A key element of analysis by economists is the discount rate--the minimum rate of return required from an investment project to make it desirable to implement. Christian Gollier outlines the basic theory of the discount rate and the various arguments that favor using a smaller discount rate for more distant cash flows.
With principles that can be applied to many policy areas,Pricing the Planet's Futureoffers an ideal framework for dynamic problems and decision making.
Les générations futures vont subir un changement climatique dont l’intensité dépendra des sacrifices auxquels nous consentirons pour affronter nos responsabilités. Il est encore temps d’agir. ...Néanmoins, devant la myriade d’actions possibles, quelles sont celles qu’il faudrait rationnellement mettre en œuvre, à quel coût, à quelle intensité, et quand ? S’il est manifeste que nous avons jusqu’à présent privilégié la « fin de mois », jusqu’où aller pour renforcer la prise en compte des impacts à très long terme de nos efforts, et de leur soutenabilité ? Quelle confiance accorder à la croissance économique et à la recherche scientifique ? Dans sa leçon inaugurale, Christian Gollier présente deux outils opérationnels déterminants pour identifier les actions à mettre en œuvre pour le climat : le taux d’actualisation et la valeur du carbone.
In this article, we derive a set of simple conditions such that ambiguity aversion always raises the demand for self-insurance and the insurance coverage, but decreases the demand for ...self-protection. We also characterise the optimal insurance design under ambiguity aversion and exhibit a case in which the straight deductible contract is optimal as in the expected utility model.
For all of their focus on asset prices, financial economists rarely ask if assets are pricedethically-that is, if their prices are compatible with the public good. Yet in a world facing major, ...possibly catastrophic problems-global warming, for instance, and growing inequality-it is now more important than ever that we allocate capital to projects that will benefit society as a whole, not just today but far into the future. In this book, Christian Gollier develops a powerful method for transforming our societal goals of collective prosperity into the cornerstone of our financial decision making.Ethical Asset Valuation and the Good Societystarts by stating transparent moral principles and, from these, derives simple rules that can be used to evaluate saving and investment decisions in terms of the public good. Rather than trying to explain observed asset prices, Gollier derives what these prices ought to be in order to direct capital toward socially desirable investments. He focuses especially on the two prices that drive most financial decisions-the price of time as reflected in the interest rate and the price of risk-and explores the role these play in our long-term planning. If investment projects in renewable energy could be financed at a lower interest rate than those linked to fossil fuels, for instance, the energy transition would be easier to accomplish. Building on criticism of the short-term thinking of financial markets, Gollier suggests ways to shift investment toward the future through the discounting of the valuation of assets and investments with long-term benefits. In this sophisticated but accessible work, Gollier builds a bridge between welfare economics and finance theory to provide a framework for ethical valuation capable of establishing what asset prices should be on the basis of our shared moral values.
In environmental matters, the free riding generated by the lack of collective action is aggravated by concerns about leakages and by the desire to receive compensation in future negotiations. The ...dominant “pledge and review” approach to mitigation will deliver appealing promises and renewed victory statements, only to prolong the waiting game. The climate change global commons problem will be solved only through coherent carbon pricing. We discuss the roadmap for the negotiation process.
Negotiators must return to the fundamentals: the need for uniform carbon pricing across countries, for verification, and for a governance process to which countries would commit. Each country would enjoy subsidiarity in its allocation of efforts within the country. We suggest an enforcement scheme based on financial and trade penalties to induce all countries to participate and comply with the agreement.
Finally, the choice among economic approaches, whether a carbon price commitment or a cap-and-trade, is subject to trade-offs, on which alternative reasonable views may co-exist. We discuss monitoring reasons for why we personally favor an international cap-and-trade agreement.
Natural capital is complex to value notably because of the high uncertainties surrounding the substitutability of its future ecosystem services. We examine a Lucas economy in which a consumption good ...is produced by combining different inputs, one of them being an ecosystem service that is partially substitutable with other inputs. The growth rate of these inputs and the elasticity of substitution evolve in a stochastic way. We characterize the socially efficient ecological discount rates that should be used to value future ecosystem services at different time horizons. We show that the inverse of the elasticity of substitution can be interpreted as the CCAPM beta of natural capital. We also show that any increase in risk of this beta reduces the ecological discount rate. If our collective beliefs about the elasticity of substitution of ecosystem services are Gaussian, the ecological discount rates go to minus infinity for finite maturities. In that case, a marginal increase in natural capital has an infinite value. We provide a realistic calibration of the model that is coherent with observed asset prices by using the model of extreme events of Barro (2006). The bliss maturity for infinite discount factors is less than 100 years in this calibration.
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