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Bliss, Catastrophe, and Rational Policy

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  • Kenneth Arrow
  • Marcel Priebsch

Abstract

Lotteries with infinite expected utility are inconsistent with the axioms of expected utility theory. To rule them out, either the set of permissible lotteries must be restricted (to exclude, at a minimum, “fat-tailed” distributions such as that underlying the St. Petersburg Paradox and power laws that are popular in models of climate change), or the utility function must be bounded. This note explores the second approach and proposes a number of tractable specifications leading to utility functions that are bounded both from above and below. This property is intimately related to that of increasing relative risk aversion as first hypothesized by Arrow ( 1965 ). Copyright Springer Science+Business Media Dordrecht 2014

Suggested Citation

  • Kenneth Arrow & Marcel Priebsch, 2014. "Bliss, Catastrophe, and Rational Policy," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 58(4), pages 491-509, August.
    • Handle: RePEc:kap:enreec:v:58:y:2014:i:4:p:491-509
    DOI: 10.1007/s10640-014-9788-6
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    2. Ian Bateman & Hassan Benchekroun & Christian Vossler, 2015. "EAERE Award for the Best Paper Published in Environmental and Resource Economics During 2014," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 62(1), pages 1-2, September.
    3. Ohad Raveh & Yacov Tsur, 2018. "Resource Windfalls and Public Debt: The Role of Political Myopia," OxCarre Working Papers 205, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
    4. Buchholz Wolfgang & Heindl Peter, 2015. "Ökonomische Herausforderungen des Klimawandels," Perspektiven der Wirtschaftspolitik, De Gruyter, vol. 16(4), pages 324-350, December.
    5. Andrea Rampa, 2020. "Climate change, catastrophes and Dismal Theorem: a critical review [Klimawandel, Katastrophen und das „Dismal Theorem“: eine kritische Überprüfung]," Review of Regional Research: Jahrbuch für Regionalwissenschaft, Springer;Gesellschaft für Regionalforschung (GfR), vol. 40(2), pages 113-136, October.
    6. Bonilla, Claudio A. & Tapia, Pablo & Ruiz, Jose Luis, 2024. "Are annuities an inferior or normal good? Evidence from a less-developed country," Economic Analysis and Policy, Elsevier, vol. 82(C), pages 724-734.
    7. Christoph M. Rheinberger & Nicolas Treich, 2017. "Attitudes Toward Catastrophe," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 67(3), pages 609-636, July.
    8. Partha Dasgupta, 2014. "Pricing climate change," Politics, Philosophy & Economics, , vol. 13(4), pages 394-416, November.

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