Guillouet, Louise and Martimort, David (2024) Acting in the darkness: towards some foundations for the precautionary principle. TSE Working Paper, n. 23-1411, Toulouse

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Abstract

Invoked to guide actions under irreversibility, uncertainty and limited information, the Precautionary Principle states that decision-makers should act cautiously unless the consequences of acts are known. We consider a setting where the stock of past actions, passed a tipping point which remains unknown, increases the probability of a catastrophe. When past acts are observable, decision-makers can reconstruct the whole evolution of stock and beliefs and follow an optimal trajectory. Otherwise, and in accordance with the Precautionary Principle, they act cautiously, remaining too optimistic on their ability to delay the tipping point. This suboptimal behaviour has minor consequences on welfare.