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Climate Policy When The Distant Future Matters: Catastrophic Events With Hyperbolic Discounting

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  • Karp, Larry S.
  • Tsur, Yacov

Abstract

Low probability catastrophic climate change can have a signifcant influence on policy under hyperbolic discounting. We compare the set of Markov Perfect Equilibria (MPE) to the optimal policy under time-consistent commitment. For some initial levels of risk there are multiple MPE; these may involve either excessive or insufficient stabilization effort. These results imply that even if the free-rider problem amongst contemporaneous decision-makers were solved, there may remain a coordination problem amongst successive generations of decision-makers. A numerical example shows that under plausible conditions society should respond vigorously to the threat of climate change.

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Bibliographic Info

Paper provided by Hebrew University of Jerusalem, Department of Agricultural Economics and Management in its series Discussion Papers with number 7181.

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Date of creation: 2007
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Handle: RePEc:ags:huaedp:7181

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Postal: Faculty of Agriculture, Food and Environmental Quality Sciences Hebrew University of Jerusalem, P.O. Box 12, Rehovot 76100
Phone: 08-9481230
Fax: 08-9466267
Web page: http://departments.agri.huji.ac.il/economics/indexe.html
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Related research

Keywords: abrupt climate change; event uncertainty; catastrophic risk; hyperbolic discounting; Markov Perfect Equilibria; Environmental Economics and Policy; C61; C73; D63; D99; Q54;

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  1. Partha Dasgupta & Eric Maskin, 2004. "Uncertainty and Hyperbolic Discounting," Economics Working Papers 0023, Institute for Advanced Study, School of Social Science.
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Cited by:
  1. Karp, Larry S. & Tsur, Yacov, 2007. "Discounting And Climate Change Policy," Discussion Papers 7149, Hebrew University of Jerusalem, Department of Agricultural Economics and Management.

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