Spaces for Agreement: A Theory of Time-Stochastic Dominance and an Application to Climate Change
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.
Simon Dietz and Nicoleta Anca Matei. Journal of the Association of Environmental and Resource Economists 2016 3:1, 85-130