More Stringent Cap or Higher Penalty Fee? Dealing with Procrastination in Environmental Protection

Dongmei Guo (), Shouyang Wang () and Lin Zhao ()
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Dongmei Guo: School of Economics, Central University of Finance and Economics
Shouyang Wang: Academy of Mathematics and Systems Science, Chinese Academy of Sciences
Lin Zhao: Academy of Mathematics and Systems Science, Chinese Academy of Sciences

Annals of Economics and Finance, 2020, vol. 21, issue 1, 41-69

Abstract: People tend to procrastinate on immediate-cost activities. In environmental protection, resource conservation and pollution control commonly involve substantial immediate costs but long-delayed benefits, giving entrepreneurs an incentive to remain inactive. This paper assumes that procrastination is induced by "present bias,"" and examines how the government can design policies that promote efficiency in the regulation of procrastinating entrepreneurs. Our main findings are threefold. First, entrepreneurial present bias makes the environmental protection investment increase faster as the compliance deadline approaches. Second, the compliance cost incurred by the entrepreneur increases with the degrees of present bias and entrepreneurial naivete. Third, relative to the traditional policy for rational entrepreneurs without present bias, the optimal policy delivers a more stringent cap for naive entrepreneurs, but a higher penalty fee for sophisticated entrepreneurs.

Keywords: Environmental policy; Time-inconsistent preferences; Present bias; Procrastination; Cap-and-trade; Principal-agent (search for similar items in EconPapers)
JEL-codes: D01 Q56 (search for similar items in EconPapers)
Date: 2020
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