Adoption of abatement technology in an uncertain world: An experiment

Abstract

This paper embeds the decision to invest in abatement technology in a social dilemma game while endogenizing the probability of environmental hazard. Both the model and a laboratory experiment show that risk-averse agents invest less in abatement, particularly when the probability of environmental damage is high. Specifically, an inverted-U relationship between investment in abatement technology and risk aversion is observed. I also find that the Bayesian Value of a Statistical Life (BVSL) correlates positively with saving and negatively with both production and abatement technology. The results suggest that uncertain damage from nature negatively affects abatement technology adoption but promotes group efficiency at low damage probabilities, while it is counterproductive for group efficiency when the probability is high. While uncertainty can bring a short-term increase in cooperation, it fails to curb the tendency towards overuse in the long run.