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ABSTRACT:
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.

SUGGESTED CITATION:
Larry Karp, "Global Warming and Hyperbolic Discounting" (July 9, 2004). Department of Agricultural & Resource Economics, UCB. CUDARE Working Paper 934R.
http://repositories.cdlib.org/are_ucb/934R