Numerical analysis of non-constant pure rate of time preference: A model of climate policy |
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Authors: | Tomoki Fujii Larry Karp |
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Institution: | aSchool of Economics, Singapore Management University, 90 Stamford Road, 178903 Singapore, Singapore;bDepartment of Agricultural and Resource Economics, University of California, 207 Giannini Hall, Berkeley, CA 94720, USA |
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Abstract: | 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. |
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Keywords: | Non-constant pure rate of time preference Hyperbolic discounting Numerical methods Non-renewable resources Observational equivalence Climate change Stern Review |
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