An Analysis of the Dismal Theorem
William D. Nordhaus
Yale University - Department of Economics; National Bureau of Economic Research (NBER)
January 20, 2009
Cowles Foundation Discussion Paper No. 1686
In a series of papers, Martin Weitzman has proposed a Dismal Theorem. The general idea is that, under limited conditions concerning the structure of uncertainty and preferences, society has an indefinitely large expected loss from high-consequence, low-probability events. Under such conditions, standard economic analysis cannot be applied. The present study is intended to put the Dismal Theorem in context and examine the range of its applicability, with an application to catastrophic climate change. I conclude that Weitzman makes an important point about selection of distributions in the analysis of decision-making under uncertainty. However, the conditions necessary for the Dismal Theorem to hold are limited and do not apply to a wide range of potential uncertain scenarios.
Number of Pages in PDF File: 27
Keywords: Dismal theorem, Uncertainty, Climate change, Catastrophes
JEL Classification: O13, D18, Q5, H43
Date posted: January 21, 2009
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