Discussion Papers, Center for European, Governance and Economic Development Research 319
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.
discounting time-consistency renewable resource use property rights growth pollution