Climate Policy when the Distant Future Matters: Catastrophic Events with Hyperbolic Discounting

44 Pages Posted: 5 Feb 2007

See all articles by Larry S. Karp

Larry S. Karp

University of California, Berkeley

Yacov Tsur

Hebrew University of Jerusalem - Department of Agricultural Economics and Management

Date Written: February 2, 2007

Abstract

Low probability catastrophic climate change can have a significant 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.

Keywords: abrupt climate change, event uncertainty, catastrophic risk, hyperbolic discounting, Markov Perfect Equilibria

JEL Classification: C61, C73, D63, D99, Q54

Suggested Citation

Karp, Larry S. and Tsur, Yacov, Climate Policy when the Distant Future Matters: Catastrophic Events with Hyperbolic Discounting (February 2, 2007). Available at SSRN: https://ssrn.com/abstract=961045 or http://dx.doi.org/10.2139/ssrn.961045

Larry S. Karp (Contact Author)

University of California, Berkeley ( email )

Dept. of Agriculture & Resource Economics
313 Giannini Hall
Berkeley, CA 94720
United States
510-643-8911 (Fax)

Yacov Tsur

Hebrew University of Jerusalem - Department of Agricultural Economics and Management ( email )

P.O. Box 12
Rehovot, 76100
Israel

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