Testing the Dismal Theorem

Arbeitspapier

Weitzman's Dismal Theorem has that the expected net present value of a stock problem with a stochastic growth rate with unknown variance is unbounded. Cost-benefit analysis can therefore not be applied to greenhouse gas emission control. We use the Generalized Central Limit Theorem to show that the Dismal Theorem can be tested, in a finite sample, by estimating the tail index. We apply this test to social cost of carbon estimates from three commonly used integrated assessment models, and to previously published estimates. Two of the three models do not support the Dismal Theorem, but the third one does for low discount rates. The meta-analysis cannot reject the Dismal Theorem.

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• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 8939

Classification and Topics

• Classification: Wirtschaft ; Specific Distributions; Specific Statistics ; Criteria for Decision-Making under Risk and Uncertainty ; Climate; Natural Disasters and Their Management; Global Warming
• Subject: climate policy ; dismal theorem ; fat tails ; social cost of carbon

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Anthoff, David ; Tol, Richard S. J.
• Event: Veröffentlichung
• (who): Center for Economic Studies and Ifo Institute (CESifo)
• (where): Munich
• (when): 2021

Further information

• Handle: http://hdl.handle.net/10419/235309