Numerical Analysis of Non-Constant Pure Rate of Time Preference: A Model of Climate Policy

• Main Authors: FUJII, Tomoki, KARP, Larry
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2010
• Subjects: Non-constant pure rate of time preference; Hyperbolic discounting; Numerical methods; Non-renewable resources; Observational equivalence; Climate change; Stern Review; Econometrics; Environmental Sciences; Statistics and Probability
• Online Access: https://ink.library.smu.edu.sg/soe_research/1282; https://ink.library.smu.edu.sg/context/soe_research/article/2281/viewcontent/NumericalAnalysis_Climate_2010.pdf
• Institution: Singapore Management University

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.