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Institutions and the Precautionary Principle: The Case of Mad Cow Disease

In the presence of scientific uncertainty many actions may end up in a catastrophic event. Many argue that in such cases the precautionary principle should be adopted. Unfortunately this principle is not clear-cut. The main purpose of this paper is to set up a model, which allows establishing the determinants and consequently the level of the precautionary acceptable cost. The model allows treating in a single framework ambiguity, catastrophic events and agency problem. The acceptable cost will be essentially determined as the amount of transfers or subsidy that the public body should direct to the agents in order to elicit the level of effort which - on the basis of the principalis most pessimistic forecasts - has the higher chances of maximizing the principal welfare and preventing the catastrophic event. The model refers to the BSE epidemic but it could be easily applied to other situations in which Knightian uncertainty (ambiguity) makes catastrophic events quite likely.