Threshold Preferences and the Environment

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
o future consumption and environmental quality. In other words, we endogenize
the semi-elasticity of utility based on a step function. We motivate the existence
of the threshold based on research from political science, from arguments based on
regulation and standards, cultural economics as well as ecological economics.
Our results are that the location of the threshold determines both the potential
steady states as well as the dynamics. 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. We discuss implications for intergenerational
equity and policy making.
As policy implications we study shifts in the threshold. Our results are that, in
case it is costless to shift the threshold, it is always worthwhile to do so. If it is
costly to change the threshold, then it is worthwhile to change the threshold if the
threshold originally was suffi ciently low. Lump-sum taxes may lead to a development
trap and should be avoided if there are uncertainties about the threshold or
the effectiveness of the policy.