Hyperbolic Discounting and Resource Collapse.

Working paper

This paper shows that the use of hyperbolic discounting in environmental regulation can have unfortunate consequences. In a three-period model we demonstrate that a planner who ‘naively’ employs hyperbolic discounting and fails to anticipate problems of dynamic inconsistency, can oversee a collapse of a renewable resource. If the regeneration rate of the resource is within a given range, and stock levels are close to the ‘minimum viable population’, then an unforeseen collapse will result. This basic result is shown to hold in an infinite-horizon, continuous-time model with hyperbolic discounting of the sort examined in Barro (1999) and Li and L¨ofgren (2001). Here, the naive planner does not anticipate extinction of its resource stock because it always plans to lower consumption (but it never does). Two conclusions follow from these results. First, the model provides an explanation for resource collapses such as that of the Peruvian anchovy and Atlantic cod. Second, governments should think carefully before they employ hyperbolic discounting in policymaking.

Authors: Hepburn, C

• Publisher: Department of Economics (University of Oxford)
• Series: Discussion paper series
• Publication date: 2003-01-01