On the Valuation of Uncertainty in Welfare Analysis

Abstract

Abstract This article develops a general model of private and public choice under temporal uncertainty. The model incorporates the effects of risk preferences and the prospect of future learning into both the individual and aggregate valuations of public projects. The analysis provides new insights on individual valuation, its implications for benefit‐cost analysis and the characterization of Pareto‐efficiency under uncertainty. It also resolves some of the confusion in the option value and quasioption value literature.