Ambiguity and Strategic Interactions in Global Pollution Problems

Ambiguity and Strategic Interactions in Global Pollution Problems

Topics: Theory

Wednesday, 28 June 2023, 15:00-16:15

Room: Zoom

Presenter: Reppas Dimitrios, Khalifa University of Science and Technology

The economics theoretical literature on strategic interactions, particularly in the context of climate
change, is scarce. This paper tries to fill this gap in the literature by exploring, through a theoretical
framework, how decision makers' different degrees of optimism or pessimism (regarding the
impacts of climate change), as well as their degree of information imprecision, may affect their
own choices to pollute (abate), but also others' such choices. The model builds on the deterministic
pollution framework of Andreoni and Levinson (2001), while allowing for uncertainty (through
the α-maximin expected-utility theory) about the consequences of pollution. The paper establishes
some theoretical results on the possible strategic interactions among decision makers. It shows that
idiosyncratic shocks in the model guarantee monotone comparative statics; while for non-
idiosyncratic shocks, only wealth shocks lead to unambiguous comparative statics. These results
are complementary to those for aggregative games with strategic substitutes, as in Acemoglu and
Jensen (2013) and Roy and Sabarwal (2010). Simulations also demonstrate the above findings.

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