Scandinavian Working Papers in Economics

Working Paper Series,
Uppsala University, Department of Economics

No 2010:16: Measuring sustainability under regime shift uncertainty: A resilience pricing approach

Chuan-Zhong Li () and Karl-Göran Mäler ()
Additional contact information
Chuan-Zhong Li: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden
Karl-Göran Mäler: The Beijer Institute of Ecological Economics, Postal: The Royal Swedish Academy of Sciences, Box 50005, SE-104 05 Stockholm Sweden

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 (1973),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.

Keywords: Regime shift; resilience; ecosystem; valuation; and inclusive wealth

JEL-codes: D60; D90; Q50

20 pages, July 2, 2010

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