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
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
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cegedp:319
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