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More Stringent Cap or Higher Penalty Fee? Dealing with Procrastination in Environmental Protection

Author

Listed:
  • Dongmei Guo

    () (School of Economics, Central University of Finance and Economics)

  • Shouyang Wang

    () (Academy of Mathematics and Systems Science, Chinese Academy of Sciences)

  • Lin Zhao

    () (Academy of Mathematics and Systems Science, Chinese Academy of Sciences)

Abstract

People tend to procrastinate on immediate-cost activities. In environmental protection, resource conservation and pollution control commonly involve substantial immediate costs but long-delayed benefits, giving entrepreneurs an incentive to remain inactive. This paper assumes that procrastination is induced by "present bias,"" and examines how the government can design policies that promote efficiency in the regulation of procrastinating entrepreneurs. Our main findings are threefold. First, entrepreneurial present bias makes the environmental protection investment increase faster as the compliance deadline approaches. Second, the compliance cost incurred by the entrepreneur increases with the degrees of present bias and entrepreneurial naivete. Third, relative to the traditional policy for rational entrepreneurs without present bias, the optimal policy delivers a more stringent cap for naive entrepreneurs, but a higher penalty fee for sophisticated entrepreneurs.

Suggested Citation

  • Dongmei Guo & Shouyang Wang & Lin Zhao, 2020. "More Stringent Cap or Higher Penalty Fee? Dealing with Procrastination in Environmental Protection," Annals of Economics and Finance, Society for AEF, vol. 21(1), pages 41-69, May.
  • Handle: RePEc:cuf:journl:y:2020:v:21:i:1:guowangzhao
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    References listed on IDEAS

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    More about this item

    Keywords

    Environmental policy; Time-inconsistent preferences; Present bias; Procrastination; Cap-and-trade; Principal-agent;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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