Uncertainty and Learning in a Strategic Environment: Global Climate Change∗

Global climate change is rife with uncertainties. Yet, we can expect to resolve much of this uncertainty in the next 100 years or so. Therefore, current actions should reflect the value of flexibility. Nevertheless, most models of climate change, particularly game-theoretic models, abstract from uncertainty. Additionally, most analysis of climate change abstracts completely from the idea that the uncertainties may not be perfectly correlated across nations. A model of the impacts of uncertainty and learning in a non-cooperative game shows that the level of correlation of damages across countries is crucial for determining optimal policy. JEL classification: C72; D81; Q28