Environmental Catastrophes under Time-Inconsistent Preferences

Thomas Michielsen
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Thomas Michielsen: Tilburg University

No 2013.55, Working Papers from Fondazione Eni Enrico Mattei

Abstract: I analyze optimal natural resource use in an intergenerational model with the risk of a catastrophe. Each generation maximizes a weighted sum of discounted utility (positive) and the probability that a catastrophe will occur at any point in the future (negative). The model generates time- inconsistency as generations disagree on the relative weights on utility and catastrophe prevention. As a consequence, future generations emit too much from the current generation’s perspective and a dynamic game ensues. I consider a sequence of models. When the environmental problem is related to a scarce exhaustible resource, early generations have an in-incentive to reduce emissions in Markov equilibrium in order to enhance the ecosystem’s resilience to future emissions. When the pollutant is expected to become obsolete in the near future, early generations may however in- crease their emissions if this reduces future emissions. When polluting inputs are abundant and expected to remain essential, the catastrophe becomes a self-fulfilling prophecy and the degree of concern for catastrophe prevention has limited or even no effect on equilibrium behaviour.

Keywords: Catastrophic Events; Decision Theory; Uncertainty; Time Consistency (search for similar items in EconPapers)
JEL-codes: C73 D83 Q54 (search for similar items in EconPapers)
Date: 2013-05
New Economics Papers: this item is included in nep-dge, nep-env, nep-gth and nep-upt
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Citations: View citations in EconPapers (1)

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