Hyperbolic discounting and the time‐consistent solution of three canonical environmental problems
2021 | journal article. A publication with affiliation to the University of Göttingen.
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- Authors
- Strulik, Holger
- Abstract
- 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, and (iii) economic growth and pollution. 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.
- Issue Date
- 2021
- Journal
- Journal of Public Economic Theory
- ISSN
- 1097-3923
- eISSN
- 1467-9779
- Language
- English