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Discounting versus risk aversion: their effects on individual demands for climate change mitigation

Risk aversion and time preferences are important sources of heterogeneity in preferences for public policies with near-term costs and uncertain future benefits. Using stated preference data, we first jointly estimate individual-specific risk aversion and discount rate parameters then use these as individual “characteristics” in a separate model to explain preferences for climate change mitigation policies. The more risk-averse the individual, and/or the lower their discount rate, the higher is their willingness to pay. We also simulate expected demand under counterfactual conditions—such as risk neutrality, or the lower social discount rates that would be used by a benevolent central planner. JEL Classification: H43, D81