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Hyperbolic discounting and the time-consistent solution of three canonical environmental problems

Holger Strulik ()

No 319, Center for European, Governance and Economic Development Research Discussion Papers from University of Goettingen, Department of Economics

Abstract: In this paper I propose a time-consistent method of discounting hyperbolically and apply it to three canonical environmental problems: (i) optimal renewable resource use, (ii) the tragedy of the commons, (iii) economic growth and pollution. I then compare results with those for conventional exponential discounting using the normalization that both methods provide the same present value of an infinite constant flow. I show that, irrespective of potentially high initial discount rates, time-consistent hyperbolic discounting leads always to a steady state of maximum yield, or, if the environment enters the utility function, a steady state where the Green Golden Rule applies. While (asymptotic) extinction is a real threat under exponential discounting it is impossible under time-consistent hyperbolic discounting. This result is also confirmed for open access resources. In a model of economic growth and pollution, hyperbolic discounting establishes the Golden Rule of capital accumulation and the Modified Green Golden Rule.

Keywords: discounting; time-consistency; renewable resource use; property rights; growth; pollution (search for similar items in EconPapers)
JEL-codes: D60 D90 Q20 Q50 Q58 O40 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene, nep-env, nep-gro and nep-upt
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cegedp:319

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