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Spaces for Agreement: A Theory of Time-Stochastic Dominance and an Application to Climate Change

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  • Simon Dietz
  • Nicoleta Anca Matei

Abstract

Many investments involve both a long time horizon and risky returns. Making investment decisions thus requires assumptions about time and risk preferences. Such assumptions are frequently contested, particularly in the public sector, and there is no immediate prospect of universal agreement. Motivated by these observations, we develop a theory and method of finding "spaces for agreement." These are combinations of classes of discount and utility function, for which one investment dominates another (or "almost" does so), so that all those whose preferences can be represented by such combinations would agree on the option to choose. The theory combines the insights of stochastic dominance and time dominance and offers a nonparametric approach to intertemporal, risky choice. We then apply the theory to climate change and show using a popular simulation model that even tough carbon emissions targets would be chosen by almost everyone, barring those with arguably "extreme" preferences.

Suggested Citation

  • Simon Dietz & Nicoleta Anca Matei, 2016. "Spaces for Agreement: A Theory of Time-Stochastic Dominance and an Application to Climate Change," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 3(1), pages 85-130.
    • Handle: RePEc:ucp:jaerec:doi:10.1086/683684
    DOI: 10.1086/683684
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    Cited by:

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    3. Lee, Kyungho & Linton, Oliver & Whang, Yoon-Jae, 2023. "Testing for time stochastic dominance," Journal of Econometrics, Elsevier, vol. 235(2), pages 352-371.
    4. Niko Jaakkola & Antony Millner, 2022. "Nondogmatic Climate Policy," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 9(4), pages 807-841.

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    More about this item

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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