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Hyperbolic discounting and the time‐consistent solution of three canonical environmental problems
Author(s) -
Strulik Holger
Publication year - 2021
Publication title -
journal of public economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.809
H-Index - 32
eISSN - 1467-9779
pISSN - 1097-3923
DOI - 10.1111/jpet.12497
Subject(s) - discounting , economics , hyperbolic discounting , mathematical economics , function (biology) , econometrics , tragedy of the commons , golden rule , capital (architecture) , consumption (sociology) , time preference , perpetuity , mathematics , microeconomics , commons , ecology , social science , history , philosophy , theology , archaeology , finance , evolutionary biology , sociology , biology
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, and (iii) economic growth and pollution. 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.