Climate Policy When the Distant Future Matters: Catastrophic Events with Hyperbolic Discounting

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Climate Policy When the Distant Future Matters: Catastrophic Events with Hyperbolic Discounting

Author Info

Larry Karp (University of California, Berkeley and Giannini Foundation)
Yacov Tsur (The Hebrew University of Jerusalem)

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Larry S. Karp

Abstract

Low probability catastrophic climate change can have a significant 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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Paper provided by Department of Agricultural & Resource Economics, UC Berkeley in its series Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series with number 1037.

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Date of creation: 02 Feb 2007
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Handle: RePEc:cdl:agrebk:1037

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Paper
- Karp, Larry & Tsur, Yacov, 2007. "Climate Policy When The Distant Future Matters: Catastrophic Events With Hyperbolic Discounting," Discussion Papers 7181, Hebrew University of Jerusalem, Department of Agricultural Economics and Management. [Downloadable!]

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Other versions:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Larry Karp & Yacov Tsur, 2007. "Discounting and Climate Change Policy," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series 1038, Department of Agricultural & Resource Economics, UC Berkeley. [Downloadable!]
Other versions:
- Karp, Larry & Tsur, Yacov, 2007. "Discounting And Climate Change Policy," Discussion Papers 7149, Hebrew University of Jerusalem, Department of Agricultural Economics and Management. [Downloadable!]

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