27 April 2021

How uncertainty affects economic decision-making

Interview with Neha Deopa about her PhD thesis, which theoretically and empirically explores the effects of uncertainty on firm decisions. 

Why did you decide to study the link between uncertainty and decision making? 

I have always been interested in how uncertainty affects economic decision-making. The primeval view of randomness and uncertainty was that of chaos and anarchy. But today we know that uncertainty in fact obeys rigorous mathematical laws. The first part of my doctoral thesis is a theoretical exploration of this idea within two different contexts in economics: ecological uncertainty and market uncertainty. The second part is an empirical exploration of two sources of contemporary uncertainty our society is facing today. 

Can you describe your research questions and methodology?

The first essay, titled “Scenes from a Monopoly: Quickest Detection of Ecological Regimes”, co-authored with Daniele Rinaldo, explores the ecological uncertainty associated with the dynamic management of natural resources which often undergo abrupt changes in their intrinsic growth rate, frequently triggered by anthropic factors. In this study, we attempt to understand how such ecological regime shifts affect the extraction decisions of firms harvesting the resource. 

In the second essay, titled “Firm Decisions under Jump-Diffusive Dynamics”, Daniele Rinaldo and I study firm investment decisions under market uncertainty, in which uncertainty includes both idiosyncratic fluctuations as well as sudden changes related to information arrival and large shocks such as the pandemic we find ourselves facing today.

The third essay, jointly written with Piergiuseppe Fortunato, is titled Coronagraben: Culture and Social Distancing in Times of COVID-19”. During the pandemic, social distancing measures have been introduced in many countries; however, their compliance rate has varied substantially. Studying the case of Switzerland, we ask if culture, proxied by language, and its various dimensions such as trust in others and preference for redistribution, plays an important role in explaining this variance. 

In the final essay, “Superbug Stories”, I look at one of the most important global health concerns we face today: antimicrobial resistance (AMR). In an attempt to understand how this is not only driven by consumption of antibiotics but also interlinked to the wider environment, I study the role of intensive farming in driving the growing crisis of resistance in humans. 

What are your major findings?

In my first essay, I find that despite the occurrence of large negative ecological regime shifts, such as the collapse of fisheries or aquifer depletion, it is possible that the firm will continue to harvest/extract the resource, even under the possibility of extinction. By characterising the conditions under which this could occur, the regulator can leverage this information for policy responses to provide sufficient incentives to the firm for more sustainable management of the resource.

My second essay sheds light on the fact that the presence of large negative shocks in market conditions influences the thresholds at which investment and disinvestment occur, thus drastically affecting the firm’s ability to recover. It prompts the firms to disinvest quicker in order to protect themselves from a shock large enough to cause shutdown, and this effect is magnified for firms with low growth rates. These findings reflect the evidence of the particularly deleterious impact of the COVID-19 pandemic on small and medium enterprises.

The third essay shows there is strong evidence for cultural explanation of compliance during COVID-19. In the absence of perfect enforcement capacity by states, cultural attitudes and behavioural norms, which typically vary from country to country, can make an important difference and explain deviations in voluntary compliance. We show that reducing mobility is less relevant as an instrument to reduce the probability of contracting the disease if one believes that the rest of the society will respect norms. The same cultural traits may elicit different responses under a crisis situation depending on contextual conditions (shaped by the culture of reference). 

Finally, the last essay highlights that while human antibiotic consumption does play an important role in the propagation of AMR, intensive livestock farming and its connection with the wider environment also have a significant and positive effect.

You defended your PhD thesis a month ago. What are you planning to do now?

I will be starting as a Swiss National Science Foundation postdoctoral fellow at the University of Oslo in September 2021, where I will study the role of disease in the link between tropical poverty and deforestation, both in terms of holistic socio-ecological modelling and empirical evidence.

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Neha Deopa defended her PhD thesis in International Economics in March 2021. Associate Professor Rahul Mukherjee presided the committee, which included Professor Ugo Panizza, supervisor, and Jérémy Lucchetti, Associate Professor at the Geneva School of Economics and Management of the University of Geneva.

Full citation of the PhD thesis:
Deopa, Neha. “Essays in Uncertain Economics.” PhD thesis, Graduate Institute of International and Development Studies, Geneva, 2021.
Good to know: members of the Graduate Institute can download the PhD thesis from this page of the Institute's repository. 

For more details on Neha Deopa’s research and contact details, please consult her personal website

Banner picture: excerpt from an image by zimmytws/
Interview by Nathalie Tanner, Research Office.