Munich Personal RePEc Archive

Discounting when income is stochastic and climate change policies

Boyarchenko, Svetlana and Levendorskii, Sergei (2010): Discounting when income is stochastic and climate change policies.

[img]
Preview
PDF
MPRA_paper_27998.pdf

Download (258kB) | Preview

Abstract

We introduce stochastic income into the standard exponential discounting model and study dependence of effective discount rates on the type of the underlying stochastic process and agent's current income level. If the income follows a process with i.i.d. increments effective discounting is exponential. If the income follows a mean reverting process, the shape of discount rate curves depends on the margin between the agent's current income and the long-run average. The model is used to study how the willingness to pay for investments in abatement technologies depends on the current wealth of a country.

UB_LMU-Logo
MPRA is a RePEc service hosted by
the Munich University Library in Germany.