Global Warming and Hyperbolic Discounting

Larry S. Karp

No 934R, Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series from Department of Agricultural & Resource Economics, UC Berkeley

Abstract: 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.

Keywords: stock pollutant; hyperbolic discounting; global warming; time consistency (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene and nep-env
Date: 2004-07-09
Note: oai:cdlib1:are_ucb-1086

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Journal Article: Global warming and hyperbolic discounting (2005)
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