Precautionary Effect and Variations of the Value of Information

For a sequential, two-period decision problem with uncertainty and under broad conditions (non-finite sample set, endogenous risk, active learning and stochastic dynamics), a general sufficient condition is provided to compare the optimal initial decisions with or without information arrival in the second period. More generally the condition enables the comparison of optimal decisions related to different information structures. It also ties together and clarifies many conditions for the so-called irreversibility effect that are scattered in the environmental economics literature. A numerical illustration with an integrated assessment model of climate-change economics is provided.

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