Hyperbolic discounting and the time-consistent solution of three canonical environmental problems |
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Authors: | Holger Strulik |
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Institution: | Department of Economics, University of Goettingen, Platz der Goettinger Sieben 3, Goettingen, Germany |
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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. |
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