Hyperbolic Discounting and Resource Collapse
AbstractThis paper shows that the use of hyperbolic discounting in environmental regulation can have unfortunate consequences. In a three-period model we demonstrate that a planner who `naively` employs hyperbolic discounting and fails to anticipate problems of dynamic inconsistency, can oversee a collapse of a renewable resource. If the regeneration rate of the resource is within a given range, and stock levels are close to the `minimum viable population`, then an unforeseen collapse will result. This basic result is shown to hold in an infinite-horizon, continuous-time model with hyperbolic discounting of the sort examined in Barro (1999) and Li and Lofgren (2001). Here, the naive planner does not anticipate extinction of its resource stock because it always plans to lower consumption (but it never does). Two conclusions follow from these results. First, the model provides an explanation for resource collapses such as that of the Peruvian anchovy and Atlantic cod. Second, governments should think carefully before they employ hyperbolic discounting in policymaking.
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Bibliographic InfoPaper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 159.
Date of creation: 01 May 2003
Date of revision:
hyperbolic discounting; time-inconsistency; renewable resources;
Other versions of this item:
- Q21 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Demand and Supply; Prices
- Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
- E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
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