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Measuring sustainability under regime shift uncertainty: a resilience pricing approach

Karl-Göran Mäler and Chuan-Zhong Li Environment and Development Economics 15: 707–719(2010). doi:10.1017/S1355770X10000318

Abstract:

This paper is concerned with the theory of resilience pricing and sustainability measurement in the presence of risk for regime shift in a dynamic economy–environment system. Following Holling (Annual Review of Ecology and Systematics, vol. 4, 1973, pp. 1–23), we consider resilience as the maximal perturbation that the system can absorb without flipping into a qualitatively different state. Using a multisector growth model under uncertainty, we derive the shadow price of resilience that affects the probabilities of the system to flip in the future.We also analyze the role of resilience on sustainability with both ex-ante and ex-post welfare measures.

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Keywords: resilience, pricing, sustainability measurement, regime shift

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