Optimal pollution management when discount rates are endogenous

M. Six and Franz Wirl

Resource and Energy Economics, 2015, vol. 42, issue C, 53-70

Abstract: This paper investigates the consequences of endogenous discounting related to a stock externality, like ‘global warming’. This topic is of interest, especially since the Stern report and the ensuing public and academic debate have made clear how crucial discounting is for evaluating anti-global warming measures. We investigate the consequences of the assumption that discounting is endogenous, more precisely, decreases as the damage increases, i.e., decision makers become more patient when facing the environmental damages following their high consumption levels. This avoids time inconsistency, a pitfall when using hyperbolic discounting. However, it can lead to quite different and sometimes counterintuitive behavior in comparison to standard exogenous discounting: an endogenous discount rate, albeit always smaller than the exogenous one, (i) can nevertheless imply high stationary damages; (ii) can lead to multiple steady states.

Keywords: Endogenous discounting; Impatience; Global warming; Multiple equilibria (search for similar items in EconPapers)
JEL-codes: C61 C62 Q54 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:resene:v:42:y:2015:i:c:p:53-70

DOI: 10.1016/j.reseneeco.2015.06.002

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