Choosing between traditional and innovative technologies: the case of scientific uncertainty

Abstract

We study the choice between a traditional technology characterized by known risks and an innovative technology (a geological storages for nuclear wastes, a genetically modified organism or a new treatment in medical science) subject to scientific uncertainty. We assume that the two technologies differ in first period implementation costs, second period risk, and degree of irreversibility, and we study the effect of foreseen scientific progress on the present choice between the two. If the first-period choice is restricted to be 'all or nothing', scientific progress promotes the traditional technology; with constant absolute risk aversion, scientific progress increases the optimal level of the technology with the higher implementation cost.