Now or Never: Environmental Protection under Hyperbolic Discounting
Economics: The Open-Access, Open-Assessment E-Journal, Vol. 3, 2009
27 Pages Posted: 8 Apr 2009 Last revised: 27 Apr 2009
Date Written: April 9, 2009
The author analyzes the optimal investment in environmental protection in a model of non-overlapping hyperbolically discounting agents. He shows that, in the long run and in the absence of a commitment device, society is stuck in a situation where all agents prefer further investments, yet no agent invests. This holds no matter whether agents are aware of the time inconsistency of their preferences. As a consequence, awareness of the time-inconsistency problem poses at best a short run remedy. Moreover, such an outcome may be Pareto inefficient and may explain the weak performance of long-run environmental policies.
Keywords: Environmental policy, Environmental protection, Hyperbolic discounting, Markov perfect equilibria, Time-inconsistency
JEL Classification: D90, Q50, Q58
Suggested Citation: Suggested Citation