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Hyperbolic discounting and the time-consistent solution of three canonical environmental problems

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  • Strulik, Holger

Abstract

In this paper I propose a time-consistent method of discounting hyperbolically and apply it to three canonical environmental problems: (i) optimal renewable resource use, (ii) the tragedy of the commons, (iii) economic growth and pollution. I then compare results with those for conventional exponential discounting using the normalization that both methods provide the same present value of an infinite constant flow. I show that, irrespective of potentially high initial discount rates, time-consistent hyperbolic discounting leads always to a steady state of maximum yield, or, if the environment enters the utility function, a steady state where the Green Golden Rule applies. While (asymptotic) extinction is a real threat under exponential discounting it is impossible under time-consistent hyperbolic discounting. This result is also confirmed for open access resources. In a model of economic growth and pollution, hyperbolic discounting establishes the Golden Rule of capital accumulation and the Modified Green Golden Rule.

Suggested Citation

  • Strulik, Holger, 2017. "Hyperbolic discounting and the time-consistent solution of three canonical environmental problems," Center for European, Governance and Economic Development Research Discussion Papers 319, University of Goettingen, Department of Economics.
  • Handle: RePEc:zbw:cegedp:319
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    More about this item

    Keywords

    discounting; time-consistency; renewable resource use; property rights; growth; pollution;

    JEL classification:

    • D60 - Microeconomics - - Welfare Economics - - - General
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • Q20 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - General
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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