Risk-adjusted policy learning and the social cost of uncertainty: Theory and evidence from CAP evaluation

2025/10/06 by Giovanni Cerulli, Cerulli, Giovanni, Francesco Caracciolo +1 · 1 voice
Agricultural and Biological Sciences · #Agricultural risk and resilience

paper · doi:10.1016/j.mlwa.2026.100934

openalex created_date 2025/10/09 · openalex publication_date 2026/06/16 · openalex updated_date 2026/07/28

Abstract

This paper develops a risk-adjusted alternative to standard optimal policy learning (OPL) for observational data by importing Roy’s (1952) safety-first principle into the treatment assignment problem. We formalize a welfare functional that maximizes the probability that outcomes exceed a socially required threshold and show that the associated pointwise optimal rule ranks treatments by the ratio of conditional means to conditional standard deviations. We implement the framework using microdata from the Italian Farm Accountancy Data Network to evaluate the allocation of subsidies under the EU Common Agricultural Policy. Empirically, risk-adjusted optimal policies systematically dominate the realized allocation across specifications, while risk aversion lowers overall welfare relative to the risk-neutral benchmark, making transparent the social cost of insurance against uncertainty. The results illustrate how safety-first OPL provides an implementable, interpretable tool for risk-sensitive policy design, quantifying the efficiency–insurance trade-off that policymakers face when outcomes are volatile.

Citations

• Optimal Policy Learning with Observational Data in Multi-Action Scenarios: Estimation, Risk Preference, and Potential Failures
• Assessing the redistributive impact of the 2013 CAP reforms: an EU-wide panel study
• High-Confidence Off-Policy (or Counterfactual) Variance Estimation
• Learning Robust Decision Policies from Observational Data
• Offline Multi-Action Policy Learning: Generalization and Optimization
• Policy Learning With Observational Data
• From Predictive to Prescriptive Analytics
• Doubly Robust Policy Evaluation and Learning
• Statistical Treatment Rules for Heterogeneous Populations
• The central role of the propensity score in observational studies for causal effects
• Estimating causal effects of treatments in randomized and nonrandomized studies.
• Safety First and the Holding of Assets

Discussions

• Risk-adjusted policy learning and the social cost of uncertainty: Theory and evidence from CAP evaluation. Giovanni Cerulli, Francesco Caracciolo doi.org/10.1016/j.ml... [bsky, 0 points, 0 comments]

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