CLIMATE POLICY WHEN THE DISTANT FUTURE MATTERS: CATASTROPHIC EVENTS WITH HYPERBOLIC DISCOUNTING

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.


Issue Date:
2007
Publication Type:
Working or Discussion Paper
PURL Identifier:
http://purl.umn.edu/7181
Total Pages:
52
JEL Codes:
C61; C73; D63; D99; Q54
Series Statement:
Discussion Paper
No. 5.07




 Record created 2017-04-01, last modified 2017-08-23

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