Economic Policy When Models Disagree

Abstract

A number of methods have recently been developed to support policy making when there is no consensual model of the situation of interest. This paper introduces a scheme which underlies and can assist all these methods. This scheme can moreover handle situations where policymakers must cope with the absence of probability distributions, an explicit utility function or a benchmark model, and where policy decisions are made through group decision making, collective/committee deliberation, or voting. It implements a single basic prescription: that the stakeholders’ willingness-to-pay for some remedy meets their willingness-to-accept the status quo. Policies that satisfy this prescription are shown to be effective, robust and precautionary in a precise intuitive sense.