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Numerical Analysis of Non-Constant Discounting with an Application to Renewable Resource Management

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  • Fujii, Tomoki
  • Karp, Larry

Abstract

The possibility of non-constant discounting is important in environmental and resource management problems where current decisions affect welfare in the far-distant future, as with climate change. The difficulty of analyzing models with non-constant discounting limits their application. We describe and provide software to implement an algorithm to numerically obtain a Markov Perfect Equilibrium for an optimal control problem with non-constant discounting. The software is available online. We illustrate the approach by studying welfare and observational equivalence for a particular renewable resource management problem.

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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 qt74q473v8.

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Date of creation: 31 May 2006
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Handle: RePEc:cdl:agrebk:qt74q473v8

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Keywords: Non-constant discounting; numerical methods; non-renewable resources; observational equivalence.; Social and Behavioral Sciences;

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  1. Jonathan E. Ingersoll Jr. & Philip H. Dybvig & Stephen A. Ross, 1998. "Long Forward and Zero-Coupon Rates Can Never Fall," Yale School of Management Working Papers ysm45, Yale School of Management.
  2. Azfar, Omar, 1999. "Rationalizing hyperbolic discounting," Journal of Economic Behavior & Organization, Elsevier, vol. 38(2), pages 245-252, February.
  3. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, December.
  4. Lars Peter Hansen & Thomas J. Sargent, 1979. "Formulating and estimating dynamic linear rational expectations models," Working Papers 127, Federal Reserve Bank of Minneapolis.
  5. Christopher Harris & David Laibson, 1999. "Dynamic Choices of Hyperbolic Consumers," Harvard Institute of Economic Research Working Papers 1886, Harvard - Institute of Economic Research.
  6. Victor Aguirregabiria & Pedro Mira, 2002. "Swapping the Nested Fixed Point Algorithm: A Class of Estimators for Discrete Markov Decision Models," Econometrica, Econometric Society, vol. 70(4), pages 1519-1543, July.
  7. Matthew Rabin, 1998. "Psychology and Economics," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 11-46, March.
  8. Robert J. Barro, 1999. "Ramsey Meets Laibson In The Neoclassical Growth Model," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1125-1152, November.
  9. 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.
  10. Li, Chuan-Zhong & Lofgren, Karl-Gustaf, 2000. "Renewable Resources and Economic Sustainability: A Dynamic Analysis with Heterogeneous Time Preferences," Journal of Environmental Economics and Management, Elsevier, vol. 40(3), pages 236-250, November.
  11. Ben Groom & Cameron Hepburn & Phoebe Koundouri & David Pearce, 2005. "Declining Discount Rates: The Long and the Short of it," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 32(4), pages 445-493, December.
  12. Karp, Larry, 2004. "Global Warming and Hyperbolic Discounting," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt5zh730nc, Department of Agricultural & Resource Economics, UC Berkeley.
  13. Dockner,Engelbert J. & Jorgensen,Steffen & Long,Ngo Van & Sorger,Gerhard, 2000. "Differential Games in Economics and Management Science," Cambridge Books, Cambridge University Press, number 9780521637329, April.
  14. Gollier, Christian, 2002. "Discounting an uncertain future," Journal of Public Economics, Elsevier, vol. 85(2), pages 149-166, August.
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