Christian Gollier

• Toulouse 1 Capitole University

As people get richer, and ecosystem services scarcer, policy-relevant estimates of ecosystem value must rise

An optimality condition for sustainability actions under discounted expected utility is that, ex post, we should almost surely regret having adjusted them too much for risk. In other words, ex post, one would almost surely feel regret for "excess" precautionary saving, excess insurance and hedging coverage, or for excess risk-bearing. Moreover, for...

Most Western countries use a single discount rate to evaluate public investments and policies. This ignores the cost of risk, in a world where most risk markets exhibit surprisingly large prices of risk. The current discounting guidelines generate a misallocation of capital that entails a large welfare cost. We claim that the well-established asset...

We surveyed economists' attitudes toward adjusting discount rates to the risk profile of public programs. Three-quarters of respondents recommend to use project-specific discount rates. For example, on average, respondents discount railway infrastructures more than hospitals and climate mitigation. But the degree of discount discrimination between...

When evaluating public and private investment projects, those that contribute more to the collective risk should be more penalized through an upward adjustment of their discount rate. This paper shows how to estimate the risk-adjusted discount rate for different projects, with applications to the electricity sector. Using the standard framework of...

Socially responsible investors constitute an important force in today's global financial markets. This paper examines conditions under which socially responsible investors induce companies to behave responsibly. We develop an asset pricing model in which some shareholders are active owners, that is, they engage companies by voting on strategic deci...

Les générations futures vont subir un changement climatique dont l’intensité dépendra des sacrifices auxquels nous consentirons pour affronter nos responsabilités. Il est encore temps d’agir. Néanmoins, devant la myriade d’actions possibles, quelles sont celles qu’il faudrait rationnellement mettre en œuvre, à quel coût, à quelle intensité, et quan...

We assume that the ex post utility of a regret-sensitive agent facing a menu of lotteries depends upon the payoff of the chosen lottery in the realized state together with the forgone best payoff available in the menu in that state. If two lotteries in the menu have the same distribution of payoffs, the one whose payoff is less statistically concor...

L'investissement socialement responsable (ISR) a le vent en poupe (avec une part de marché de 10 % en Europe) et cela se comprend. Dans un contexte de suspicion sur la finance et ses excès, et sur la capacité de l'Etat à réguler les marchés pour impulser un mode de développement plus responsable, plus durable et plus solidaire, les citoyens se sont...

L'investissement socialement responsable (ISR) a le vent en poupe (avec une part de marché de 10 % en Europe) et cela se comprend. Dans un contexte de suspicion sur la finance et ses excès, et sur la capacité de l'Etat à réguler les marchés pour impulser un mode de développement plus responsable, plus durable et plus solidaire, les citoyens se sont...

The diffidence theorem, together with complementary tools, can aid in illuminating a broad set of questions about how to mathematically characterize the set of utility functions with specified economic properties. This article establishes the technique and illustrates its application to many questions, old and new. For example, among many other old...

How does climate-change mitigation affect the aggregate consumption risk borne by future generations? In other words, what is the ‘climate beta’? In this paper we argue using a combination of theory and integrated assessment modelling that the climate beta is positive and close to unity for maturities of up to about one hundred years. This is becau...

Why the traditional “pledge and review” climate agreements have failed, and how carbon pricing, based on trust and reciprocity, could succeed. After twenty-five years of failure, climate negotiations continue to use a “pledge and review” approach: countries pledge (almost anything), subject to (unenforced) review. This approach ignores everything w...

Why the traditional “pledge and review” climate agreements have failed, and how carbon pricing, based on trust and reciprocity, could succeed. After twenty-five years of failure, climate negotiations continue to use a “pledge and review” approach: countries pledge (almost anything), subject to (unenforced) review. This approach ignores everything w...

Under expected utility, the uncertainty that affects the parameters of the random walk of consumption growth has no effect on the value of short-term claims and makes the term structure of risk-free rates decreasing. The term structure of aggregate risk premia is increasing when the uncertain cumulants of log consumption are independent. We apply t...

Using the gamma discounting argument of Weitzman (1998, 2001) when future interest rates are uncertain, several countries have decided to base their investment and sustainability policy evaluation on a decreasing term structure of discount rates. We show that this interpretation of the gamma discounting argument is in fact equivalent to the Local E...

In this paper, we discuss the systemic relevance of the insurance sector. Systemic risk is defined as the propensity of a financial institution to be undercapitalised when the financial system as a whole is undercapitalised. By the law of large numbers, traditional lines of insurance with idiosyncratic non-catastrophic risks cannot be systemic. On...

The socially efficient allocation of risks in an economy of risk-averse agents is examined. This allows the potential social value of insurance to be measured. The reasons why most risks can be only partially insured are transaction costs, adverse selection, risqué moral, risk of fraud and limited liability, are then explored. The regulation of the...

What Should We Expect from the Digital Revolution for the Insurability of Risk? The economics of insurance has demonstrated that information is at the core of the insurability problem, and more generally of the allocation of risks in the economy. In this article, I show that improving the quality of information generally has an ambiguous effect on...

In environmental matters, the free riding generated by the lack of collective action is aggravated by concerns about leakages and by the desire to receive compensation in future negotiations. The dominant 'pledge and review" approach to mitigation will deliver appealing promises and renewed victory statements, only to prolong the waiting game. The...

Under which condition does the set of desirable uncertain prospects expand when wealth increases? We show that the decreasing concavity (DC) of the utility function  is necessary and sufficient in the −maxmin expected utility model. In the smooth ambiguity aversion model with the ambiguity valuation function , the DC of  and of  •  is necessa...

La littérature récente offre plusieurs arguments en faveur d’une meilleure prise en compte du très long terme dans l’évaluation des investissements. Ceci justifie l’utilisation d’un taux réduit pour actualiser les coûts et bénéfices à long terme des investissements publics. Néanmoins, dans une économie décentralisée où ces investissements sont réal...

The choice of the rate at which one should discount the long-term benefits of mitigating climate change is highly controversial. Both the level and the slope of the term structure of discount rates have been discussed intensively in relation to the determination of the social cost of carbon. Although some of the parameters of the problem are ethica...

The presence of a background risk is believed to reduce the consumer's willingness to accept other independent risks. Under expected utility, this is true only under some restrictions on the utility function.

Should governments use a discount rate that declines over time when evaluating the future benefits and costs of public projects? The argument for using a declining discount rate (DDR) is simple: if the discount rates that will be applied in the future are uncertain but positively correlated, and if the analyst can assign probabilities to these disc...

In a growing economy, the discount rate to evaluate a long-term investment is the minimum rate of expected return that compensates for the increased intergenerational inequalities. Because the growth rate is uncertain, there is a precautionary argument in favor of lowering the discount rate. If shocks to growth are persistent, this is a robust argu...

Le principe de précaution est très populaire aujourd’hui. Mais a-t-il un fondement économique ? Nous présentons deux théories économiques de la précaution. La première se base sur le cadre classique d’espérance d’utilité avec révision bayésienne des croyances. La seconde se fonde sur l’aversion à l’ambiguïté. Nous discutons l’intérêt, mais aussi le...

In September 2011, the US Environmental Protection Agency asked 12 economists how the benefits and costs of regulations should be discounted for projects that affect future generations. This paper summarizes the views of the panel on three topics: the use of the Ramsey formula as an organizing principle for determining discount rates over long hori...

In this article, we derive a set of simple conditions such that ambiguity aversion always raises the demand for self-insurance and the insurance coverage, but decreases the demand for self-protection. We also characterise the optimal insurance design under ambiguity aversion and exhibit a case in which the straight deductible contract is optimal as...

The economic theory of decision making under risk has seen remarkable advances over the 50 years since Pratt’s (1964) characterization of risk aversion under expected utility. We review developments in three key areas to which Louis Eeckhoudt has made significant contributions: (1) increases in risk and risk taking; (2) self-protection and risk ave...

This chapter provides a survey on optimal insurance when insurers and policyholders have symmetric information about the distribution of potential damages. Under general conditions on the policyholder risk aversion and on transaction costs, the optimal insurance contract contains full insurance of losses above a straight deductible. This is proven...

The United States and others should consider adopting a different approach to estimating costs and benefits in light of uncertainty.

In economic project analysis, the rate at which future benefits and costs are discounted relative to current values often determines whether a project passes the benefit-cost test. This is especially true of projects with long time horizons, such as those to reduce greenhouse gas (GHG) emissions. Whether the benefits of climate policies, which can...

Coherent-ambiguity aversion is de…ned within the Klibanoff, Marinacci and Mukerji (2005) smooth-ambiguity model (henceforth KMM) as the combination of choice-ambiguity and value- ambiguity aversion. Five ambiguous decision tasks are analyzed theoretically, where an individual faces two-stage lotteries with binomial, uniform or unknown second-order...

How should one evaluate investment projects whose CCAPM betas are uncertain? This question is particularly crucial for projects yielding long-lasting impacts on the economy, as is the case for example for many green investments. We define the notion of a certainty equivalent beta. We show that its term structure is not constant and that, for short...

We examine an important class of decision problems under uncertainty that entails the standard portfolio problem and the demand for coinsurance. The agent faces a controllable risk-his demand for a risky asset, for example-and a background risk. We determine how a change in the distribution in one of these two risks affects the optimal exposure to...

Preserving flexibility has a high value in an uncertain environment. This common wisdom has long been given support from the economic literature through the notion of option value. We interpret the precautionary principle (PP) in the light of this literature on option value. Formally, we examine the impact of incomplete and evolving information on...

Because of the uncertainty about how to model the growth process of our economy, there is still much confusion about which discount rates should be used to evaluate actions having long-lasting impacts, as in the contexts of climate change, social security reforms or large public infrastructures for example. In this paper, we take this critique seri...

What financial performance can one expect from socially responsible investments? What is the impact of socially responsible investors on corporate behavior? In order to address these issues, we study the functioning of financial markets when firms can invest in activities that produce externalities. We consider a model in which some investors are s...

In our Western economies, the abnegation of past generations has contributed to improving current generations' welfare. What about now? Under the pressure of ecological catastrophists, is the current generation too burdened in favor of future generations or on the contrary, is it not burdened enough in view of the risks to be borne by our descendan...

Our path of economic development has generated a growing list of environmental problems including the disposal of nuclear waste, exhaustion of natural resources, loss of biodiversity, climate change, and polluted land, air, and water. All these environmental problems raise the crucial challenge of determining what we should and should not do for fu...

We define coherent-ambiguity aversion within the Klibanoff, Marinacci and Mukerji (2005) smooth ambiguity model (henceforth KMM) as the combination of choice-ambiguity aversion and value-ambiguity aversion. We analyze theoretically five ambiguous decision tasks, where a subject faces two-stage lotteries with binomial, uniform or unknown second-orde...

We examine the characteristics of the optimal insurance contract under linear transaction cost and an ambiguous distribution of losses. Under the standard expected utility model, we know from Arrow (1965) that it contains a straight deductible. In this paper, we assume that the policyholder is ambiguity-averse in the sense of Klibanoff, Marinacci a...

Les fonds d’Investissement Socialement Responsable cherchent à offrir aux épargnants des portefeuilles d’entreprises performantes non seulement dans le domaine financier, mais aussi social et environnemental. Comment faire de la finance un instrument de l’émergence d’une société meilleure ?

Résumé En faisons-nous trop ou pas assez pour le futur? Cette question est sous-jacente à de nombreuses questions économiques actuelles, comme celles de la réduction de la dette, de la réforme des retraites, de la lutte contre le changement climatique, de la préservation des ressources naturelles, des investissements publics d'infrastructure, ou de...

This chapter reviews the main arguments for and against industrial policies that promote national or European champions. The arguments may be organized in three groups: static (extracting monopoly rent abroad; protecting employment); political-economy; and dynamic ones (innovative champions; spillovers, clusters, and poles). From the perspective of...

Economists address key challenges facing the EU, including financial instability, welfare state reform, inadequate institutional framework, and global economic integration. The European Union began with efforts in the Cold War era to foster economic integration among a few Western European countries. Today's EU constitutes an upper tier of governme...

An understanding of risk and how to deal with it is an essential part of modern economics. Whether liability litigation for pharmaceutical firms or an individual's having insufficient wealth to retire, risk is something that can be recognized, quantified, analyzed, treated--and incorporated into our decision-making processes. This book represents a...

Forest trees, as long-lived organisms, are exposed to various and major biotic or abiotic hazards, whose associated damage can affect dramatically forest management and even the whole forest sector. Using the case of the 1999 forest gales which blew down 200 million cubic meters of wood in Europe, the paper underlines the need for a better integrat...

This paper investigates the comparative statics of “more ambiguity aversion” as defined by Klibanoff, Marinacci and Mukerji (2005, “A Smooth Model of Decision Making under Ambiguity”, Econometrica, 73 (6), 1849–1892). The analysis uses the static two-asset portfolio problem with one safe asset and one uncertain one. While it is intuitive that more...

Using the extended Ramsey rule, the socially efficient rate is the difference between a wealth effect and a precautionary effect of economic growth. This second effect is increasing in the degree of uncertainty affecting the future. In the literature, it is usually calibrated by estimating the historical volatility of the growth of GDP in a specifi...

Standard cost–benefit analyses and asset pricing theories are based on the assumption that investment projects have marginal impacts on the consumption flows of stakeholders, so that social values and prices are not affected. This may not be true for large projects, such as those related to climate change or to the implementation of infrastructure...

Inefficient financial markets are believed to generate credit rationing and prevent national firms from exploiting their competitive advantages abroad. This chapter discusses how some governments in the presence of inefficiency encourage national champions by protecting them against competition in the domestic market. An industrial policy supportin...

Nations around the world differ on the role of industrial policy to nurture “national champions.” Some support and adopt neoliberal approaches that advocate economic liberalization and some encourage strong government protection for national champions. This chapter sheds light on the diverse range of industrial policy arguments and sets out the pur...

Prominent economists present the pros and cons of government's subsidizing or protecting firms that are “national champions.” Governments around the world are deeply divided about the proper role of industrial policy, with some politicians arguing for hands-off governance and others supporting government intervention to promote “national champions”...

Prominent economists present the pros and cons of government's subsidizing or protecting firms that are “national champions.” Governments around the world are deeply divided about the proper role of industrial policy, with some politicians arguing for hands-off governance and others supporting government intervention to promote “national champions”...

Notes de Synthèse N° 233, Centre Analyse Stratégique, Paris, Juillet 2011

Prominent economists present the pros and cons of government's subsidizing or protecting firms that are "national champions." © 2011 Massachusetts Institute of Technology. All rights reserved.

The aim of this paper is to examine the impact of inequalities and economic convergence on the efficient discount rate, in the absence of any risk-sharing scheme. We consider an economy in which the initial consumption level and the distribution of consumption growth are heterogeneous. The benchmark case is when inequalities are permanent and relat...

We propose a new decision criterion under risk in which people extract both utility from anticipatory feelings ex ante and disutility from disappointment ex post. The decision maker chooses his degree of optimism, given that more optimism raises both the utility of ex ante feelings and the risk of disappointment ex post. We characterize the optimal...

It is not immediately clear how to discount distant-future events, like climate change, when the distant-future discount rate itself is uncertain. The so-called “Weitzman-Gollier puzzle ” is the fact that two seemingly symmetric and equally plausible ways of dealing with uncertain future discount rates appear to give diametrically opposed results w...

In this paper, we describe the determinants of the socially efficient discount rate for the distant future. We provide various arguments in favour of a decreasing term structure. They are based on a precautionary argument given the rapid accumulation oif uncertainties affecting the future growth of our economies. We recommend a real discount rate o...

Which rates should we use to discount costs and benefits of different natures at different time horizons? We answer this question by considering a representative agent consuming two goods whose availability evolves over time in a stochastic way. We extend the Ramsey rule by taking into account the degree of substitutability between the two goods an...

Weitzman [1] showed that when future interest rates are uncertain, using the expected net present value implies a term structure of discount rates that is decreasing to the smallest possible interest rate. On the contrary, using the expected net future value criteria implies an increasing term structure of discount rates up to the largest possible...

The current financial crisis is expected to have a considerable impact on the pension benefits to be paid in the future in most countries in which funded schemes play an important role in the social security system. Typically, pension funds invest more than 50% of their reserves in equity – with the remaining being invested in bonds, bills, real es...

In this paper, we elaborate on an idea initially developed by Weitzman (1998) that justifies taking the lowest possible discount rate for far-distant future cash flows. His argument relies on the arbitrary assumption that when the future rate of return of capital (RRC) is uncertain, one should invest in any project with a positive expected net pres...

Introduction This chapter reports an econometric analysis conducted for a real case, but the identities of the firms have been suppressed for confidentiality reasons. The merger was eventually approved by the relevant national authority. The study is aimed at providing a measure of unilateral effects of the proposed acquisition of A by B on an insu...

IntroductionTheoretical FrameworkEmpirical Estimation of the Optimal Trajectory of DDRDiscounting Climate Change DamagesConcluding RemarksAppendix: Estimation and Model SelectionReferences

This paper explores empirically the link between French equities returns Value-at-Risk (VaR) and the state of financial markets cycle. The econometric analysis is based on a simple vector autoregression setup. Using quarterly data from 1970Q4 to 2008Q3, it turns out that the k-year VaR of French equities is strongly dependent on the cycle phase: th...

We examine the functioning of financial markets when firms can invest in socially responsible activities that produce an externality at a cost. We examine a model in which some investors are altruistic in the sense that they internalize the assets' extra-financial performance when they value their portfolio. There are two mechanisms by which these...

Cost-effectiveness analysis, which ranks projects by quality adjusted life years gained per dollar spent, is widely used in the evaluation of health interventions. We show that cost effectiveness analysis can be derived from two axioms: society prefers Pareto improvements and society values discounted life years, lived in perfect health, equally fo...

We consider an economy with an ambiguity-averse representative agent who faces an uncertain consumption growth. We examine the condition under which ambiguity aversion reduces the socially efficient discount rate. We show that ambiguity aversion affects the interest rate in two ways. The first effect is an ambiguity prudence effect similar to the p...

The purpose of this paper is to offer an exposition of the results on the existence and optimality of equilibria when production sets are not assumed to be convex, in a general equilibrium framework. We aim at providing a formal and systematic account of the main results available, rather than survey the literature. Besides presenting an abstract m...

We consider an expected-utility-maximizing consumer living two periods who can invest in two assets, one of which is risk free. We do not restrict relative risk aversion to be constant. We first examine the effect that a change in the opportunity set in the second period has on the optimal saving in the first period. We show that an increase in the...

When the growth of aggregate consumption exhibits no serial correlation, the socially efficient discount rate is independent of the time horizon, because the wealth effect and the precautionary effect are proportional to the time horizon. In this paper, we consider alternative growth processes: an AR(1), a Brownian motion with unknown trend or vola...

Should economic policy target immediate problems like malaria and AIDS? Or should it target climate change, which may have even more dramatic life-threatening effects in the very long term? We discuss how the pattern of discount rates over the planning horizon bears on this important issue. A declining pattern of discount rates is theoretically jus...

This paper explores French assets returns predictability within a VAR setup. Using quarterly data from 1970Q4 to 2006Q4, it turns out that bonds, equities and bills returns are actually predictable. This feature implies that the investment horizon does indeed matter in the asset allocation. The VAR parameters estimates are then used to compute real...

Les prêts hypothécaires dits « subprimes » représentent un peu moins de 1000 milliards de dollars d’encours aux États-Unis. Une bonne partie correspond à des prêts contractés avant 2005 dont on peut raisonnablement penser qu’ils seront entièrement remboursés. Parce que l’on peut aussi raisonnablement penser que le marché immobilier américain va cor...

The precautionary principle (PP), as it appears in international treaties or in some countries’ legal systems, suggests that the prospect of scientific progress should not justify the delay of preventive measures. Three effects identified in the economics literature – the irreversibility, the precautionary and the ambiguity aversion effects – may b...

The use of a Declining Discount Rate (DDR), in cost-benefit analysis (CBA), compared to the use of a Constant Discount Rate, implies that the policy maker will put relatively more effort to improve social welfare in the far distant future than in the shorter time. The choice between the two discount rates is crucial and linked, for example, to the...

Mention d'édition : 2. Ed.

Abstract In this paper, we provide a survey of the literature on why risks may be costly for firms, but also on why firms may find difficulty to insure them. A wide variety of arguments are provided, at the intersection of the economic theory of insurance, corporate finance, and decision theory. 1I ntroduction

We show that, for all developed countries for which data are available, the relative riskiness of equity compared to bonds and bills goes down when the investment horizon increases. In particular, VAR setups show that this effect is very strong. This fact implies that investors with a longer investment horizon should invest relatively more in equit...