Threshold preferences and the environment

in Journal of Mathematical Economics (2015), 60

In this article we study the implication of thresholds in preferences. To model this we extend the basic model of John and Pecchenino (1994) by allowing the current level of environmental quality to have ... [more ▼]

In this article we study the implication of thresholds in preferences. To model this we extend the basic model of John and Pecchenino (1994) by allowing the current level of environmental quality to have a discrete impact on how an agent trades off future consumption and environmental quality. Thus, we endogenize the semi-elasticity of utility based on a step function. We find that for low (high) thresholds, environmental quality converges to a low (high) steady state. For intermediate levels it converges to a stable p-cycle, with environmental quality being asymptotically bounded below and above by the low and high steady state. As policy implications we study shifts in the threshold. Costless shifts of the threshold are always worthwhile. If it is costly to change the threshold, then it is worthwhile to change the threshold if the threshold originally was sufficiently low. Lump-sum taxes lead to a development trap and a proportional income tax should be preferred. [less ▲]

Pollution Perception: A Challenge for Intergenerational Equity

in Journal of Environmental Economics and Management (2008), 55

In this article we extend the recent literature on overlapping generations and pollution by allowing generations to perceive the level of pollution differently than the actual level of pollution. We call ... [more ▼]

In this article we extend the recent literature on overlapping generations and pollution by allowing generations to perceive the level of pollution differently than the actual level of pollution. We call this pollution perception. Pollution perception can visualize itself as either a concern for the °ow of pollution only, or for the stock, or a combination of both. We derive this extension based on empirical evidence from recent advances in behavioral economics. Pollution perception has not only signifficant consequences for the steady state levels of pollution and capital, but we also and a qualitative change in the dynamics from similar models without pollution perception [23]. Specifically, we derive optimal non-linear dynamics through complex eigenvalues and Hopf or Flip bifurcations for a large set of parameters. This leads to violations of two standard criteria of sustainability, suggesting that pollution perception can be another source of intergenerational inequity. [less ▲]