Acting in the Darkness: Some Foundations for the Precautionary Principle

Abstract

A decision-maker enjoys surplus from his current action but faces the possibility of an irreversible catastrophe, an event that follows a non-homogeneous Poisson process with a rate that depends on the stock of past actions. Passed a tipping point, the probability of a disaster increases. Only the distribution of possible values of the tipping point is known. For such a context that entails irreversibility, uncertainty and limited information, the Precautionary Principle, viewed as a constitutional commitment to an action plan, has repeatedly been invoked to guide decision-making. Although the optimal feedback rule should a priori determine actions in terms of both the stock of past actions and the current beliefs on whether the tipping point has been passed or not, an incomplete Stock-Markov feedback rule that only depends on stock suffices to implement the optimum. In such a Stock-Markov Equilibrium, the decision-maker conjectures that future selves stick to the same Stock-Markov feedback rule in the future, and observes deviations by previous selves if any. When deviations are non-observable and future selves have no evidence on how beliefs should change, equilibrium actions remain too low and beliefs are sticky. A commitment to ban actions below the equilibrium Stock-Markov feedback rule with observable deviations prevents such opportunistic deviations and restores the optimal trajectory.

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Reference

Louise Guillouet, and David Martimort, “Acting in the Darkness: Some Foundations for the Precautionary Principle”, TSE Working Paper, n. 23-1411, February 2023.