UC Berkeley

We provide a new, more general definition for the irreversibility effect and demonstrate its relevance to problems involving environmental and other decisions under uncertainty. We establish several analytical and numerical results that suggest both that the effect holds more widely that generally recognized, and that an existing result (Epstein's Theorem), giving a sufficient condition for determining whether the effect holds, can be applied more widely than previously indicated, in particular to problems involving intertemporarally nonseparable benefit functions. We further show that a low elasticity of intertemporal substitution will however result in failure of the effect.