Discounting when income is stochastic and climate change policies

Svetlana Boyarchenko () and Sergei Levendorskii

MPRA Paper from University Library of Munich, Germany

Abstract: We introduce stochastic income into the standard exponential discounting model and study dependence of effective discount rates on the type of the underlying stochastic process and agent's current income level. If the income follows a process with i.i.d. increments effective discounting is exponential. If the income follows a mean reverting process, the shape of discount rate curves depends on the margin between the agent's current income and the long-run average. The model is used to study how the willingness to pay for investments in abatement technologies depends on the current wealth of a country.

Keywords: time preference; discounted utility anomalies; uncertainty; willingness to pay (search for similar items in EconPapers)
JEL-codes: D81 D91 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene and nep-env
Date: 2010-11-02
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