Acting in the Darkness: Do We Need a 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 and uncertainty, the Precautionary Principle, viewed as a constitutional commitment to prudent actions, has repeatedly been invoked to regulate risk. 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 feedback rule that only depends on stock suces to implement the optimum. In such a Stock-Markov Equilibrium, the decision-maker can only commit to actions over innitesimally short periods of time, but conjectures that his future selves stick to such an incomplete rule in the future. A contrario, committing to such an incomplete feedback rule once for all is suboptimal. Actions remain too low and beliefs do not change quickly enough; pointing out at the cost of the Precautionary Principle.