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

See all articles by Dongmei Guo

Dongmei Guo

affiliation not provided to SSRN

Shouyang Wang

Chinese Academy of Sciences (CAS) - Center for Forecasting Science; Academy of Mathematics and Systems Sciences

Lin Zhao

Chinese Academy of Sciences (CAS) - Academy of Mathematics and Systems Science; Chinese Academy of Sciences (CAS) - University of Chinese Academy of Sciences

Date Written: November 16, 2019

Abstract

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

Guo, Dongmei and Wang, Shouyang and Zhao, Lin, More Stringent Cap or Higher Penalty Fee? Dealing with Procrastination in Environmental Protection (November 16, 2019). Annals of Economics and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3488328

Dongmei Guo

affiliation not provided to SSRN

Shouyang Wang

Chinese Academy of Sciences (CAS) - Center for Forecasting Science; Academy of Mathematics and Systems Sciences ( email )

China

Lin Zhao (Contact Author)

Chinese Academy of Sciences (CAS) - Academy of Mathematics and Systems Science ( email )

Zhongguancun East Road 55
Beijing, 100190
China

Chinese Academy of Sciences (CAS) - University of Chinese Academy of Sciences ( email )

Zhongguancun Road 80
Beijing, Beijing 100190
China

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