More Stringent Cap or Higher Penalty Fee? Dealing with Procrastination in Environmental Protection
Annals of Economics and Finance, Forthcoming
36 Pages Posted: 3 Dec 2019
Date Written: November 16, 2019
People tend to procrastinate on immediate-cost activities. In environmental protection, resource conservation and pollution control commonly involve substantial immediate costs but long-delayed benefits, giving entrepreneurs an incentive to remain inactive. This paper assumes that procrastination is induced by "present bias," and examines how the government can design policies that promote efficiency in the regulation of procrastinating entrepreneurs. Our main findings are threefold. First, entrepreneurial present bias makes the environmental protection investment increase faster as the compliance deadline approaches. Second, the compliance cost incurred by the entrepreneur increases with the degrees of present bias and entrepreneurial naivete. Third, relative to the traditional policy for rational entrepreneurs without present bias, the optimal policy delivers a more stringent cap for naive entrepreneurs, but a higher penalty fee for sophisticated entrepreneurs.
Keywords: environmental policy, time-inconsistent preferences, present bias, procrastination, cap-and-trade, principal-agent
JEL Classification: D01, Q56
Suggested Citation: Suggested Citation