Global Warming and Hyperbolic Discounting

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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Publication Type:
Working or Discussion Paper
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JEL Codes:
D83; L50
Series Statement:
CUDARE Working Paper 934R

 Record created 2017-04-01, last modified 2017-08-22

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