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Optimal Conservation Policy Under Imperfect Intergenerational Altruism

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  • Luca Di Corato

    (Department of Economics, SLU)

Abstract

In this paper we study the optimal forest conservation policy by a hyperbolically discounting society. Society comprises a series of non-overlapping imperfectly altruistic generations each represented by its own government. Under uncertainty about future pay-offs we determine, as solution of an intergenerational dynamic game, the optimal timing of irreversible harvest. Earlier harvest occurs and the option value attached to the forest clearing decision is eroded under both the assumptions of naïve and sophisticated belief about future time-preferences. This results in a bias toward the current generation gratification which affects the intergenerational allocation of benefits and costs from harvesting and conserving a natural forest.

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Bibliographic Info

Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2011.89.

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Date of creation: Dec 2011
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Handle: RePEc:fem:femwpa:2011.89

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Keywords: Imperfect Altruism; Real Options; Hyperbolic Discounting; Time Inconsistency; Natural Resources Management;

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  1. Karp, Larry, 2005. "Global warming and hyperbolic discounting," Journal of Public Economics, Elsevier, vol. 89(2-3), pages 261-282, February.
  2. Ted O'Donoghue & Matthew Rabin, 1996. "Doing It Now or Later," Discussion Papers 1172, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Grenadier, Steven R. & Wang, Neng, 2007. "Investment under uncertainty and time-inconsistent preferences," Journal of Financial Economics, Elsevier, vol. 84(1), pages 2-39, April.
  4. Reed, William J., 1993. "The decision to conserve or harvest old-growth forest," Ecological Economics, Elsevier, vol. 8(1), pages 45-69, August.
  5. Nowak, Andrzej S., 2006. "A multigenerational dynamic game of resource extraction," Mathematical Social Sciences, Elsevier, vol. 51(3), pages 327-336, May.
  6. Harry R Clarke & William J. Reed, 1989. "The Tree-Cutting Problem in a Stochastic Environment: The case of Age Dependent Growth," Working Papers 1989.01, School of Economics, La Trobe University.
  7. Luca Di Corato & Michele Moretto & Sergio Vergalli, 2010. "An Equilibrium Model of Habitat Conservation under Uncertainty and Irreversibility," Working Papers 2010.160, Fondazione Eni Enrico Mattei.
  8. 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.
  9. Leroux, Anke D. & Martin, Vance L. & Goeschl, Timo, 2009. "Optimal conservation, extinction debt, and the augmented quasi-option value," Journal of Environmental Economics and Management, Elsevier, vol. 58(1), pages 43-57, July.
  10. Conrad, Jon M., 1997. "On the option value of old-growth forest," Ecological Economics, Elsevier, vol. 22(2), pages 97-102, August.
  11. G. Cornelis van Kooten & Robert A. Schipper, 2002. "Forest Conservation in Costa Rica when Nonuse Benefits are Uncertain but Rising," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 84(1), pages 150-160.
  12. Shane Frederick & George Loewenstein & Ted O'Donoghue, 2002. "Time Discounting and Time Preference: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 40(2), pages 351-401, June.
  13. Cox, John C. & Ross, Stephen A., 1976. "The valuation of options for alternative stochastic processes," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 145-166.
  14. Winkler, Ralph, 2006. "Does 'better' discounting lead to 'worse' outcomes in long-run decisions? The dilemma of hyperbolic discounting," Ecological Economics, Elsevier, vol. 57(4), pages 573-582, June.
  15. Saez-Marti, Maria & Weibull, Jorgen W., 2005. "Discounting and altruism to future decision-makers," Journal of Economic Theory, Elsevier, vol. 122(2), pages 254-266, June.
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Cited by:
  1. Di Corato, Luca, 2014. "Investment stimuli under government present-biased time preferences," Working Paper Series 2014:3, Department Economics, Swedish University of Agricultural Sciences.

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