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A Note On The Consequences Of An Endogenous Discounting Depending On The Environmental Quality

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Author Info
LE KAMA, ALAIN AYONG
SCHUBERT, KATHELINE

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Abstract

Our intention is to study, in the framework of a very simple optimal growth model, the consequences on the optimal paths followed by consumption and the environmental quality of an endogenous discounting. Consumption directly comes from the use of environmental services and so is a direct cause of environmental degradation. The environment is valued both as a source of consumption and as an amenity. For a sustainability concern, we introduce an endogenous discount rate growing with the environmental quality, and compare the optimal growth paths with the ones obtained in the usual case of exogenous and constant discounting. We show that the convergence of the environmental quality toward a steady state occurs only for a very special configuration of the parameters in the exogenous discounting case, whereas it occurs generically in the endogenous discounting one. This happens for a utility discount rate becoming sufficiently high when the environmental quality is high and sufficiently low when the environmental quality is poor. In this case, then, endogenous discounting with a positive marginal discount rate allows us to avoid the depletion of the environment.

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Publisher Info
Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

Volume (Year): 11 (2007)
Issue (Month): 02 (April)
Pages: 272-289
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Handle: RePEc:cup:macdyn:v:11:y:2007:i:02:p:272-289_06

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. David I. Laibson, 1996. "Hyperbolic Discount Functions, Undersaving, and Savings Policy," NBER Working Papers 5635, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Ayong Le Kama, Alain D., 2001. "Sustainable growth, renewable resources and pollution," Journal of Economic Dynamics and Control, Elsevier, vol. 25(12), pages 1911-1918, December. [Downloadable!] (restricted)
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  4. Palivos, Theodore & Wang, Ping & Zhang, Jianbo, 1997. "On the Existence of Balanced Growth Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(1), pages 205-24, February.
  5. Robert J. Barro, 1999. "Ramsey Meets Laibson In The Neoclassical Growth Model," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1125-1152, November. [Downloadable!] (restricted)
  6. Loewenstein, George & Prelec, Drazen, 1992. "Anomalies in Intertemporal Choice: Evidence and an Interpretation," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 573-97, May. [Downloadable!] (restricted)
  7. Tjalling C. Koopmans, 1959. "Stationary Ordinal Utility and Impatience," Cowles Foundation Discussion Papers 81, Cowles Foundation, Yale University. [Downloadable!]
  8. Weitzman, Martin L., 1998. "Why the Far-Distant Future Should Be Discounted at Its Lowest Possible Rate," Journal of Environmental Economics and Management, Elsevier, vol. 36(3), pages 201-208, November. [Downloadable!] (restricted)
  9. Obstfeld, Maurice, 1990. "Intertemporal dependence, impatience, and dynamics," Journal of Monetary Economics, Elsevier, vol. 26(1), pages 45-75, August. [Downloadable!] (restricted)
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  10. Graciela Chichilnisky, 1996. "An axiomatic approach to sustainable development," Social Choice and Welfare, Springer, vol. 13(2), pages 231-257, April. [Downloadable!] (restricted)
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  11. Harvey, Charles M., 1994. "The reasonableness of non-constant discounting," Journal of Public Economics, Elsevier, vol. 53(1), pages 31-51, January. [Downloadable!] (restricted)
  12. Gollier, Christian, 2002. "Time Horizon and the Discount Rate," Journal of Economic Theory, Elsevier, vol. 107(2), pages 463-473, December. [Downloadable!] (restricted)
  13. Becker, Robert A. & Boyd, John III & Sung, Bom Yong, 1989. "Recursive utility and optimal capital accumulation. I. Existence," Journal of Economic Theory, Elsevier, vol. 47(1), pages 76-100, February. [Downloadable!] (restricted)
  14. Li, Chuan-Zhong & Lofgren, Karl-Gustaf, 2000. "Renewable Resources and Economic Sustainability: A Dynamic Analysis with Heterogeneous Time Preferences," Journal of Environmental Economics and Management, Elsevier, vol. 40(3), pages 236-250, November. [Downloadable!] (restricted)
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  1. SCHUMACHER, Ingmar, 2006. "On optimality, endogenous discounting and wealth accumulation," CORE Discussion Papers 2006103, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE). [Downloadable!]
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