×

Numerical analysis of non-constant pure rate of time preference: a model of climate policy. (English) Zbl 1210.91093

Summary: When current decisions affect welfare in the far-distant future, as with climate change, the use of a declining pure rate of time preference (PRTP) provides potentially important modeling flexibility. The difficulty of analyzing models with non-constant PRTP limits their application. We describe and provide software (available online) to implement an algorithm to numerically obtain a Markov perfect equilibrium for an optimal control problem with non-constant PRTP. We apply this software to a simplified version of the numerical climate change model used in the Stern Review. For our calibration, the policy recommendations are less sensitive to the PRTP than widely believed.

MSC:

91B76 Environmental economics (natural resource models, harvesting, pollution, etc.)
91B06 Decision theory

Software:

CompEcon
PDFBibTeX XMLCite
Full Text: DOI Link

References:

[1] Azar, O.: Rationalizing hyperbolic discounting, J. econ. Behav. organ. 38, 245-252 (1999)
[2] Chichilnsky, G.: An axiomatic approach to sustainable development, Soc. choice welfare 13, 231-257 (1996) · Zbl 0846.90005 · doi:10.1007/BF00183353
[3] Cropper, M. L.; Ayded, S. K.; Portney, P. R.: Preferences for life-saving programs: how the public discounts time and age, J. risk uncertainty 8, 243-266 (1994)
[4] Dasgupta, P.: Commentary: the stern review’s economics of climate change, Nat. inst. Econ. rev. 199, No. 1, 4-7 (2007)
[5] Dockner, E.; Jorgensen, S.; Van Long, N.; Sorger, G.: Differential games in economics and management sciences, (2000) · Zbl 0996.91001
[6] Dybvig, P. H.; Ingersoll, J. E.; Ross, S. A.: Long forward and zero coupon rates can never fall, J. bus. 69, 1-25 (1996)
[7] T. Fujii, Manual for discrete time continuous state quasi-dynamic programming equation solver, Singapore Management University, 2008.
[8] Gollier, C.: Discounting an uncertain future, J. public econ. 85, 149-166 (2002)
[9] Gollier, C.: Time horizon and the discount rate, J. econ. Theory 107, 463-473 (2002) · Zbl 1033.91032 · doi:10.1006/jeth.2001.2952
[10] C. Gollier, Consumption-based determinants of the term structure of discount rates, Mathematics Finan. Econ. 1 (2) (2007) 81 – 101. · Zbl 1138.91545 · doi:10.1007/s11579-007-0004-0
[11] Gollier, C.; Zeckhauser, R.: Aggregation of heterogeneous time preferences, J. polit. Economy 113, 878-896 (2005)
[12] Groom, B.; Hepburn, C.; Koundouri, P.; Pearce, D.: Declining discount rates: the long and the short of it, Environ. resource econ. 32, 445-493 (2005)
[13] Harris, C.; Laibson, D.: Dynamic choices of hyperbolic consumers, Econometrica 69, No. 5, 935-957 (2001) · Zbl 1020.91042 · doi:10.1111/1468-0262.00225
[14] Heal, G.: Intertemporal welfare economics and the environment, The handbook of environmental economics (2001)
[15] Judd, K. L.: Numerical methods in economics, (1998) · Zbl 0924.65001
[16] Karp, L.: Global warming and hyperbolic discounting, J. public econ. 89, 261-282 (2005)
[17] Karp, L.: Non-constant discounting in continuous time, J. econ. Theory 132, 557-568 (2007) · Zbl 1142.91668 · doi:10.1016/j.jet.2005.07.006
[18] L. Karp, Y. Tsur, Time perspective, discounting and climate change policy, 2007, Unpublished working paper \langle http://are.Berkeley.EDU/karp/\rangle .
[19] Krusell, P.; Kuruscu, B.; Smith, A.: Equilibrium welfare and government policy with quasi-geometric discounting, J. econ. Theory 105, 42-72 (2002) · Zbl 1015.91040 · doi:10.1006/jeth.2001.2888
[20] Laibson, D.; Repetto, A.; Tobacman, J.: Self control and saving for retirement, Brookings pap. Econ. act. 1998, 91-196 (1998)
[21] Li, C. Z.; Lofgren, K. G.: Renewable resources and economic sustainability: a dynamic analysis with heterogeneous time preferences, J. environ. Econ. manage. 40, 236-250 (2000) · Zbl 0964.91026 · doi:10.1006/jeem.1999.1121
[22] Miranda, M. J.; Fackler, P. L.: Applied computational economics and finance, (2002) · Zbl 1014.91015
[23] Nordhaus, W. D.: A review of the stern review on the economics of climate change, J. econ. Lit. 45, No. 3, 686-702 (2007)
[24] Pakes, A.; Mcguire, P.: Computing Markov-perfect Nash equilibria: numerical implications of a dynamic differentiated product model, RAND J. Econ. 25, No. 4, 555-589 (1994)
[25] Rabin, M.: Psychology and economics, J. econ. Lit. 36, 11-46 (1998)
[26] N. Stern, Stern review on the economics of climate change, Technical Report, HM Treasury, UK, 2006.
[27] Tsutsui, S.; Mino, K.: Nonlinear strategies in dynamic duopolisitc competition with sticky prices, J. econ. Theory 52, 136-161 (1990) · Zbl 0731.90014 · doi:10.1016/0022-0531(90)90071-Q
[28] Weitzman, M.: Gamma discounting, Amer. econ. Rev. 91, No. 1, 260-271 (2001)
[29] Weitzman, M.: A review of the stern review on the economics of climate change, J. econ. Lit. 45, No. 3, 703-724 (2007)
[30] Weitzman, M.: Subjective expectations of asset price puzzles, Amer. econ. Rev. 97, No. 4, 1102-1130 (2007)
This reference list is based on information provided by the publisher or from digital mathematics libraries. Its items are heuristically matched to zbMATH identifiers and may contain data conversion errors. In some cases that data have been complemented/enhanced by data from zbMATH Open. This attempts to reflect the references listed in the original paper as accurately as possible without claiming completeness or a perfect matching.