Social discounting under risk and ambiguity.

Humboldt-Universitt zu Berlin.
Denitsa Angelova
Martin Weitzman's Dismal Theorem
1
The main result of the paper concerns the conditional expectation of marginal utility E[M].
For any given values n and k:
lim
\-
E[M]=
since
lim
c-
e
j cz
c
n+k
=
Main steps in the proof.
Starting point is the equation
E[M]=

e
j y
f ( y) dy
The agent is presumed alive, hence C D(), Y lnD():
E[M]=

lnD( \)

e
jy
f ( y) dy
Thus:
E[M]

lnD(\)

e
j y
f ( y)dy
Plug in the posterior-predictive PDF f(y):
E[M| \]

lnD( \)

e
j y
[

h( y| c) p
n
(c| y) d c] dy
Substitution of p
n
( y ) yields :
E[M| \]

lnD( \)

e
j y
[

h( y| c) p
0
(c)
n

j =1
h( y
j
| c) d c] dy
Further substitution of p
0
() and h(y):
E[M| \]

lnD( \)

e
j y
[

1
c
1(
yj
c
)c
k
n

j =1
1
c
1(
y
j
j
c
) d c] dy
1 Weitzman Martin. On Modeling and Interpreting the Economics of Catastrophic Climate Change. Review of
Economics and Statistics 91, no. 1 (2009): 1-19.
1
Social discounting under risk and ambiguity.
Humboldt-Universitt zu Berlin.
Denitsa Angelova
Reverse the order of integration:
E[M| \]

1
c
n+k +1
n

j =1
1(
y
j
j
c
)[

lnD(\)

e
j y
1(
yj
c
) dy ] d c
Determine the new limits of integration, associated with a change of variable [ z=( yj)/c ]:
Y(D()) [lnD;] [0; ] because D() = 0; then z (- ; ). Since dy/dz=:
E[M| \]

1
c
n+k +1
n

j =1
1(
y
j
j
c
)[

e
jcz jj
1( z)c dz ] d c
Acknowledging that e
-
is a constant and reversing the order of integration again yields:
E[M| \]

1( z) [

1
c
n+k
e
jc z
n

j =1
1(
y
j
j
c
) d c] dz
The integrant is positive in the hole domain. If it can be shown that its value explodes in some
interval for , then the value of the integral goes to infinity as . The functions are not
significant for the asymptotic behavior and are therefore ignored. The analysis for some open
neighborhood around z
1
< 0, where (z) > 0 shows that:
lim
c-
e
j cz
c
n+k
=
Hence, E[M] goes to infinity as .
2