An Analysis of the Dismal Theorem

27 Pages Posted: 21 Jan 2009  

William D. Nordhaus

Yale University - Department of Economics; Cowles Foundation, Yale University; National Bureau of Economic Research (NBER)

Date Written: January 20, 2009

Abstract

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.

Keywords: Dismal theorem, Uncertainty, Climate change, Catastrophes

JEL Classification: O13, D18, Q5, H43

Suggested Citation

Nordhaus, William D., An Analysis of the Dismal Theorem (January 20, 2009). Cowles Foundation Discussion Paper No. 1686. Available at SSRN: https://ssrn.com/abstract=1330454

William D. Nordhaus (Contact Author)

Yale University - Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States
203-432-3598 (Phone)
203-432-5779 (Fax)

Cowles Foundation, Yale University ( email )

Box 208281
New Haven, CT 06520-8281
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Paper statistics

Downloads
470
Rank
47,434
Abstract Views
1,906