Climate Change Adaptation under Heterogeneous Beliefs

TL;DR

This paper models how firms with different beliefs about climate change impacts make strategic decisions on mitigation and production, revealing that uncertainty influences efforts and firms' actions are interdependent.

Contribution

It introduces a Cournot-type equilibrium model capturing heterogeneous beliefs and strategic mitigation efforts, highlighting the substitutive effects of uncertainty among firms.

Findings

Uncertainty increases optimal mitigation efforts.

Firms' mitigation efforts act as substitutes.

Heterogeneous beliefs influence strategic interactions.

Abstract

We study strategic interactions between firms with heterogeneous beliefs about future climate impacts. To that end, we propose a Cournot-type equilibrium model where firms choose mitigation efforts and production quantities such as to maximize the expected profits under their subjective beliefs. It is shown that optimal mitigation efforts are increased by the presence of uncertainty and act as substitutes; i.e., one firm's lack of mitigation incentivizes others to act more decidedly, and vice versa.