Economics meets statistics: Expected utility and catastrophic risk

We derive necessary and sufficient conditions on the utility function of the expected utility model to avoid fragility of a cost-benefit analysis to distributional assumptions. The conditions ensure that expected (marginal) utility remains finite also under heavy-tailed distributional assumptions. We apply these conditions to the context of economy-climate catastrophe. We specify a stylized two-period stochastic economy-climate model. We show that, under expected power utility, the model is fragile to heavy-tailed distributional assumptions and, based on our derived conditions, we solve the model for two cases with compatible economic and statistical assumptions