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

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  • Karp, Larry
  • Tsur, Yacov
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.

Suggested Citation

  • Karp, Larry & Tsur, Yacov, 2007. "Climate Policy When the Distant Future Matters: Catastrophic Events with Hyperbolic Discounting," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt99n7v1bp, Department of Agricultural & Resource Economics, UC Berkeley.
    • Handle: RePEc:cdl:agrebk:qt99n7v1bp
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    Cited by:

    1. Karp, Larry S. & Tsur, Yacov, 2007. "Discounting and Climate Change Policy," CUDARE Working Papers 7192, University of California, Berkeley, Department of Agricultural and Resource Economics.

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    More about this item

    Keywords

    abrupt climate change; event uncertainty; catastrophic risk; hyperbolic discounting; Markov Perfect Equilibria;
    All these keywords.

    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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