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Global warming and hyperbolic discounting

  • Karp, Larry

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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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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  2. Karp, Larry, 2004. "Non-Constant Discounting in Continuous Time," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt7pr05084, Department of Agricultural & Resource Economics, UC Berkeley.
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