Voluntary Contributions with Uncertainty: The Environmental Quality

Abstract

This paper presents an overlapping generations model of environmental externalities with a depollution technology. Each agent concerned by the environmental degradation can voluntarily contribute in order to reduce it. Contributing to the environmental quality means financing depollution activities and uncertainty concerns its efficiency since it's not always clear or certain what effects will result from a reduction of pollution. We show that if an agent is sufficiently risk averse, voluntary contribution is a decreasing function of average efficiency of depollution technology. If on the contrary, the substitution effect is weaker than the pollution effect, the opposite holds. We show that precaution about environmental quality has two possible consequencies which depend on agent risk aversion. Therefore, understanding the implication of precautionary attitude, leads us to the consideration of the agents' risk aversion characterization and studying the effect of an increase in risk aversion implies a knowledge on prudent attitude. So, we have to conclude that precaution and risk aversion are two complementary and indissociable concepts.