Prescriptivism, Risk Aversion, and Intertemporal Substitution in Climate Economics

21 Pages Posted: 23 Feb 2018

See all articles by J. Paul Kelleher

J. Paul Kelleher

University of Wisconsin - Madison

Gernot Wagner

New York University (NYU) - Department of Environmental Studies; New York University (NYU) - Robert F. Wagner Graduate School of Public Service

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Date Written: February 11, 2018

Abstract

The question of how to discount the distant future has long been at the core of climate economics. It has also divided economists. Some argue for prescriptivist approaches to discounting, often calling for social discount rates of as low as 1% per year. Others argue strongly for descriptivist approaches and rates as high as 5% or more. A look to financial economics has since added another wrinkle, by pointing to the need to separate risk aversion from intertemporal substitution to calibrate real-world behavior, at times lowering effective, ‘descriptivist’ rates close to prescriptivist ones.

We attempt to reconcile some of these methodological differences by identifying three types of prescriptivism. Economists are frequently uncomfortable with what we term parameter prescriptivism, while being comfortable with both axiom and policy prescriptivism. That faces theoretical challenges. We argue that if a priori moral reasoning is not allowed to influence parameter values, then the results of one’s analysis should not be framed as a prescriptive policy ‘recommendation’. While descriptivist analysis is relevant to policy, we must be clear that it can only inform policy choices, not determine them. As a case study, we use our framework to evaluate arguments for replacing the standard isoelastic utility function with Epstein-Zin preferences in economic analyses of climate change.

Keywords: Climate change, discounting, prescriptivism, non-prescriptivism, Ramsey, Epstein-Zin

JEL Classification: D6, H43, Q5

Suggested Citation

Kelleher, J. Paul and Wagner, Gernot, Prescriptivism, Risk Aversion, and Intertemporal Substitution in Climate Economics (February 11, 2018). Available at SSRN: https://ssrn.com/abstract=3122604 or http://dx.doi.org/10.2139/ssrn.3122604

J. Paul Kelleher

University of Wisconsin - Madison ( email )

716 Langdon Street
Madison, WI 53706-1481
United States

Gernot Wagner (Contact Author)

New York University (NYU) - Department of Environmental Studies ( email )

285 Mercer Street
New York, NY 10003
United States

New York University (NYU) - Robert F. Wagner Graduate School of Public Service ( email )

The Puck Building
295 Lafayette Street, Second Floor
New York, NY 10012
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