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Global warming and hyperbolic discounting

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  • Karp, Larry

Abstract

The use of a constant discount rate to study long-lived environmental problems such as global warming has two disadvantages: the prescribed policy is sensitive to the discount rate, and with moderate discount rates, large future damages have almost no effect on current decisions. Time-consistent quasi-hyperbolic discounting alleviates both of these modeling problems, and is a plausible description of how people think about the future. We analyze the time-consistent Markov Perfect equilibrium in a general model with a stock pollutant. The solution to the linear-quadratic specialization illustrates the role of hyperbolic discounting in a model of global warming.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 89 (2005)
Issue (Month): 2-3 (February)
Pages: 261-282

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Handle: RePEc:eee:pubeco:v:89:y:2005:i:2-3:p:261-282

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Web page: http://www.elsevier.com/locate/inca/505578

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References

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  1. Matthew Rabin, 1998. "Psychology and Economics," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 11-46, March.
  2. Martin L. Weitzman, 1998. "Gamma Discounting," Harvard Institute of Economic Research Working Papers 1843, Harvard - Institute of Economic Research.
  3. Karp, Larry, 2004. "Non-constant discounting in continuous time," CUDARE Working Paper Series 0969, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
  4. Karp, Larry, 1996. "Depreciation erodes the Coase Conjecture," European Economic Review, Elsevier, vol. 40(2), pages 473-490, February.
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  8. Read, Daniel, 2001. " Is Time-Discounting Hyperbolic or Subadditive?," Journal of Risk and Uncertainty, Springer, vol. 23(1), pages 5-32, July.
  9. Pizer, William & Newell, Richard, 2000. "Discounting the Distant Future: How Much Do Uncertain Rates Increase Valuations?," Discussion Papers dp-00-45, Resources For the Future.
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  11. Shane Frederick & George Loewenstein & Ted O'Donoghue, 2002. "Time Discounting and Time Preference: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 40(2), pages 351-401, June.
  12. Ariel Rubinstein, 2003. ""Economics and Psychology"? The Case of Hyperbolic Discounting," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(4), pages 1207-1216, November.
  13. Robert A. Driskill, 2002. "A Proposal for a Selection Criterion in a Class of Dynamic Rational Expectations Models with Multiple Equilibria," Vanderbilt University Department of Economics Working Papers 0210, Vanderbilt University Department of Economics.
  14. Heal, Geoffrey, 2005. "Intertemporal Welfare Economics and the Environment," Handbook of Environmental Economics, in: K. G. Mäler & J. R. Vincent (ed.), Handbook of Environmental Economics, edition 1, volume 3, chapter 21, pages 1105-1145 Elsevier.
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