Local Environmental Quality and Heterogeneity in an OLG Agent-Based Model with Network Externalities

Most of the theoretical contributions on the relationship between economy and environment assumes the environment as a good distributed homogeneously among the agents. The aim of this work is to weaken this hypothesis and to consider that the environment can have a local character even if conditioned through externalities by the choices made at global level. In particular, adapting the classical framework introduced in John and Pecchenino (1994) to analyze the dynamic relationship between environment and economic process, in this paper we propose an OLG agent-based model where the agents may have different initial environmental endowments, or may be heterogeneous in their preferences. What emerges is that, despite the attention devoted to local environmental aspects, the network externalities (determined through the scheme of Moore neighbourhoods) play a fundamental role in defining environmental dynamics and they may induce the emergence of chaotic dynamics. On the other hand, the heterogeneity of preferences and/or initial conditions plays an ambiguous role. In fact, depending on the weight of network externalities and the impact of consumption and/or defensive expenditures, heterogeneity may stabilize or destabilize the system.