What Is The Pain At The Top Of My Thigh

Esther Duflo

The very prestigious John Bates Clark Medal , has been awarded to Esther Duflo. If you do not know his work, I invite you to listen to his lectures at College de France (2009) or the University of All Knowledge (2003).

Breastfeeding To Oldman

Carpe diem and discount rates

The awareness of citizens about the environment and global warming was it fleeting? The credibility of the IPCC, which won Nobel Prize for his studies on climate change, she will burst like a bubble in the sun?

The craze for "green" seems to falter, the Copenhagen summit was a fiasco and opponents of the theory of global warming have increasingly voice. As an illustration, just before Copenhagen, e-mails of climatologists are pirated and septic discovering the content of these messages are claiming victory. Called a victory Climategate that
researchers tweak the data (a dark history of recent dates are not taken into account where the temperatures would be lower and a questioning of the temperatures in the middle ages). In addition, a few months ago, is a study of the Himalayas that sank bcp ink due to an error of the IPCC (the glaciers would disappear by 2035 ... an unbelievable error damaging to the credibility of institution) and everywhere that there are more videos to the names speak for themselves ( the scam of global warming example).

Such controversy tends to raise the discount rate of agents, and thereby, relative to the costs of inaction. Unlike the "Land Day" and other events an objective way around.

The post today deals specifically with the discount rate, he finds its source in the text of Godard (2008), Heal (2008) and Schubert (2006).

The discount rate

If you know nothing of the discount rate, I recommend a ride home by optimum.

The discount rate is defined as:

rho = d + n (c) g (c)

or rho is the famous discount rate that depends on the rate of time preference of the elasticity of marginal utility n and the rate of consumption growth g (c).

As noted by Weitzman (2007) most economists have until now used a triplet of 2 (d = 2, n (c) = 2, g (c) = 2) where something very close to get a discount rate they considered to be plausible, either with the tripling of 2: rho = 6%. Birdsall and Steer (1993) advocate a rate of 8% and Nordhaus (2007) adopts a discount rate of around 4.5%. What led these authors relativize the need for action against global warming, the costs are much higher because of the discount rate important. Some authors are even came to the conclusion that climate change costs were so low that they did not support the Kyoto Protocol. In contrast, Stern and his team have used very different values is d = 0.1, n (c) = 1, g (c) = 1.3 which gives a rate of 1.4%. At this rate, the costs of inaction can amount to 20% of world per year. The cost of action against climate change being only 1% per year, the need for action against CO2 emissions seems obvious from reading the Stern report. In the following sections we will study the various parameters and variables of this discount rate for economists understand the debate on the need to act today.

growth rate of consumption

The growth rate of per capita consumption g (c) is at least questionable, it can be seen using historical consumption data. But projections made then are still objectionable, the past does not augur well for this particular long projections that certain resources would run out. Indeed, environmental degradation could lead to a drastic reduction in consumption (and more so that environmental goods and capital goods are complementary). To analyze this it is necessary to introduce natural capital (denoted k), the discount rate is then style rho = d + n (c) g (c) + n (k) g (k). This shows that not only analyze the evolution of the consolidated g (c) but also natural capital g (k) and finally investigate the complementarity or substitutability of consumption and natural capital in the well-being, Let n (k). It can change a lot of stuff in the analysis, I refer to Heal for those interested, he proposed to study non-substitutable goods for low income and minimal consumption of certain natural assets is essential and difficult replaceable.

rate of preference for this

What weight should we give to the future? rate of time preference of answers to this question, it is exogenous and its choice is ethical , it is the weight that is attributed to future generations, it reflects a society's aversion to inequality generations.

In a quote often repeated Ramsey (1928), true to its utilitarian tradition, wrote: "It is ASSUMED That We do not discount Enjoyment Later in Comparison with Earlier ones, A Practice Which Is Ethically indefensible and Merely Arises From The Weakness Of The Imagination "for him this rate should be zero, each generation has the same way.

is quite convenient to consider with d = 0 all generations have the same weight, but it is an approximation because if one digs a bit it's not entirely true, Koopmans (1960) noted in particular (with reference to optimal growth models) with a This rate, saving generations should be very close to significant (an unrealistic sacrifice) to satisfy the consumption of the infinite number of generations future, thus d = 0 does not guarantee completely equal treatment in the standard models. In a Rawlsian view, considering that thanks to economic growth future generations will be richer, while the primary objective is to maximize the fate of the current generation.

noted that many experiments question the consistency of pure time preference. People tend, in certain situations, to react more easily to a proportional change in time rather than absolute change. In such a case the rate of time preference is decreasing. Equally

Ethics is the choice of n, which is in some ways the intragenerational inequity aversion. Unfortunately the theory is far from clear on this rate, which can also be regarded as the degree of risk aversion .

This rate depends on the concavity of the utility function, ie the decrease of marginal utility.

With n equal to unity, Stern believes that the present generation should pay a cost of 1% as of 2150 do not have to pay a cost of more than 1% (in terms of per capita consolidated) and same they are 10 times richer. It is certainly questionable, it is difficult to ask the present generation to sacrifice themselves and for generations that do not exist and which will be richer (often referred to as "our children" to refer to future generations, even though most of the time "our children" belong to this generation).

If Stern had chosen n = 3 then the conclusion of immediate action was no longer valid. Weitzman proposes n = 2 and Heal and Kristrom cite the financial literature for which risk aversion (that is other than n) is included in 2 and 6. Sterner in contrast, believes that value already as high as it would involve transfers that are not observed in the present world.

aversion America and the cost of action

We will present here the study of Heal and Kristrom. The question posed by the authors is: what are the costs to pay to avoid the risk of climate change?
Note I on corporate income in the event of an absence of climate change, and u (I) the benefit derived in such a case. Climate change can have several locations, with a probability p that affect global income becomes equal to I. The expected utility after climate change is the sum of p * u (I). Assume that this change in the environment appear on the date of C and denote the weight given to profit or loss at time t +1 relative to those of time t. With these notations d ^ {t-1} is the weight given to losses at time t compared to date 1. Suppose we want to fund a clean-up costs from now until the date C to prevent climate change. What will this cost? This cost will be denoted x solving the following equation:

T is the maximum time horizon. The authors set T = 1000. x can also be seen as the additional cost to switch to cleaner technology to clean technology ie solar, geothermal etc. *. They study three scenarios, one scenario A, where the likelihood of losing 5% of world income is 20%, the probability of losing 15% is 10% and the probability of losing 25% is 5%. There is in this scenario a 65% chance of losing nothing. And expected loss amounts to 3.75%. Other scenarios shown below are more optimistic.

Table 2 sets of values to the index of risk aversion (Between 0 and 6) and the discount rate (between 1 and 5%) and uses the probability of scenario A to solve the equation (x ). This gives us the various additional costs of transition from a polluting technology to clean technology:

IRRA is the index of risk aversion (risk aversion for a utility u (I) given by-Iu''/ u ') and Delta tiny employed by the authors is our discount rate d. The authors thus show that the expenditure required to prevent climate change could represent 8.13% of world income if risk aversion is high (IRRA = 6) and if the discount rate is low. For other values of parameters that cost could rise only 0.1% (not reported here). The problem with this type of study is the probability of occurrence of a disaster are unknown.

In conclusion

Uncertainty is at the heart of the debate on climate change (temperature increase or the consequences of this increase in terms of precipitation, wind, sea level rise but ....) and we are not here in the risky world of economists "mainstream" where we know the probability of occurrence of different states of nature and where one could calculate the expected utility, but in a world of radical uncertainty in which the distribution of risks is not known. Not knowing the probability distribution of climate change, Henry and Henry (2002) proposed an axiomatic approach critically on the expected utility from their point of view it seems necessary to then apply a precautionary principle. But there is hardly anything to be optimistic, the tragedy of the commons applies here, the strategic interactions between countries leads to a prisoner's dilemma, the situation where all pollute the world is a Nash equilibrium (Copenhagen).

The day the earth or the environment, or calls to cut electricity reminds us that this equilibrium is not Pareto efficient. But the difficulties to coordinate, to bind his hands as Odysseus facing the sirens seem insurmountable as the time preference is high and low risk aversion in our future societies.

Biblio partial
Godard, 2008, Long-term update, Journal of Philosophical Economics. 9 (2), 69-92.

Heal, G., Climate economics, a meta-review and some suggestion, NBER n 13927.

Heal, Geoffrey and Bengt Kriström 2002. Uncertainty and Climate Change. Environmental and Resource Economics, 22, 3-39.

Henry, C and M Henry 2002. "Formalization and applications of the Precautionary Principle,"Working Paper, Laboratoire d'Économetrie de l'École Polytechnique.

Nordhaus, William 1993. Rolling the DICE: An Optimal Transition for Controlling the Emission of Greenhouse Gases, Resource and Energy Economics, 15: 27-50.

Nordhaus,William 2007. The Stern Review of the Economics of Climate Change, Journal of Economic Literature.

Schubert K, 2006, Eléments sur l'actualisation and the environment, Louvain Economic Review 72 (2).

Footnote post

* With the development of these technologies, the authors assume that this cost will decrease and will be equal to zero on the day when climate change will take place. As an illustrative example they assume that this change should occur in 50 years. Moreover x is expressed as% of world income whose initial value is set at 10. The authors use a utility function with constant risk aversion.