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

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Listed author(s):
  • 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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File URL: http://purl.umn.edu/7181
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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
Handle: RePEc:ags:huaedp:7181
Contact details of provider: 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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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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Find related papers by JEL classification:
  • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
  • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
  • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
  • D99 - Microeconomics - - Micro-Based Behavioral Economics - - - Other
  • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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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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