Bernard Sinclair-Desgagné (HEC Montreal) and Pauline Barrieu (LSE CATS): Economic Policy when Models Disagree

Thursday, 30 April, 2:00, LAK 2.06

Bernard Sinclair-Desgagné (HEC Montreal) and Pauline Barrieu (LSE CATS) Economic Policy when Models Disagree

ABSTRACT: This paper introduces a general approach to conceive public policy when there is no consensual model of the situation of interest. This approach builds on one basic attribute  of rational policymakers — namely their ability to appraise their experts’ scenarios and  forecasts — and uses only one normative criterion: that the value to policymakers of a  remedy’s projected outcomes meets their willingness to escape the current situation.  Unlike the methods currently put forward in the literature, it does not need — but  is compatible with — a representative policymaker’s objective function (as in the ambiguity aversion literature), a reference model (as in robust control theory) or some prior probability distribution over the set of supplied scenarios (as in Bayesian model-averaging). It can handle situations where policy decisions are made through collective deliberations and voting. Policies constructed in this manner are shown to be effective, robust, simple and precautionary in a precise and intuitive sense.