Environmental Catastrophes Under Time-inconsistent Preferences

T.O. Michielsen

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Abstract

Abstract I analyze optimal natural resource use in an intergenerational model with the risk of a catastrophe. Each generation maximizes a weighted sum of discounted utility (positive) and the probability that a catastrophe will occur at any point in the future (negative). The model generates time-inconsistency as generations disagree on the relative weights on utility and catastrophe prevention. As a consequence, future generations emit too much from the current generation’s perspective and a dynamic game ensues. I consider a sequence of models. When the environmental problem is related to a scarce exhaustible resource, early generations have an incentive to reduce emissions in Markov equilibrium in order to enhance the ecosystem’s resilience to future emissions. When the pollutant is expected to become obsolete in the near future, early generations may however increase their emissions if this reduces future emissions. When polluting inputs are abundant and expected to remain essential, the catastrophe becomes a self-fulfilling prophecy and the degree of concern for catastro- phe prevention has limited or even no effect on equilibrium behaviour.
Original languageEnglish
Place of PublicationTilubrg
PublisherEconomics
Number of pages39
Volume2013-013
Publication statusPublished - 2013

Publication series

NameCentER Discussion Paper
Volume2013-013

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Time-inconsistent preferences
Catastrophe
Resource use
Resilience
Natural resources
Self-fulfilling prophecy
Incentives
Discounted utility
Relative weight
Markov equilibrium
Dynamic games
Exhaustible resources
Time inconsistency
Ecosystem

Keywords

  • catastrophic events
  • decision theory
  • uncertainty
  • time consistency

Cite this

Michielsen, T. O. (2013). Environmental Catastrophes Under Time-inconsistent Preferences. (CentER Discussion Paper; Vol. 2013-013). Tilubrg: Economics.
Michielsen, T.O. / Environmental Catastrophes Under Time-inconsistent Preferences. Tilubrg : Economics, 2013. (CentER Discussion Paper).
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Michielsen, TO 2013 'Environmental Catastrophes Under Time-inconsistent Preferences' CentER Discussion Paper, vol. 2013-013, Economics, Tilubrg.

Environmental Catastrophes Under Time-inconsistent Preferences. / Michielsen, T.O.

Tilubrg : Economics, 2013. (CentER Discussion Paper; Vol. 2013-013).

Research output: Working paperDiscussion paperOther research output

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AB - Abstract I analyze optimal natural resource use in an intergenerational model with the risk of a catastrophe. Each generation maximizes a weighted sum of discounted utility (positive) and the probability that a catastrophe will occur at any point in the future (negative). The model generates time-inconsistency as generations disagree on the relative weights on utility and catastrophe prevention. As a consequence, future generations emit too much from the current generation’s perspective and a dynamic game ensues. I consider a sequence of models. When the environmental problem is related to a scarce exhaustible resource, early generations have an incentive to reduce emissions in Markov equilibrium in order to enhance the ecosystem’s resilience to future emissions. When the pollutant is expected to become obsolete in the near future, early generations may however increase their emissions if this reduces future emissions. When polluting inputs are abundant and expected to remain essential, the catastrophe becomes a self-fulfilling prophecy and the degree of concern for catastro- phe prevention has limited or even no effect on equilibrium behaviour.

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Michielsen TO. Environmental Catastrophes Under Time-inconsistent Preferences. Tilubrg: Economics. 2013. (CentER Discussion Paper).