Threshold Preferences and the Environment

44 Pages Posted: 5 Jul 2013

See all articles by Ingmar Schumacher

Ingmar Schumacher

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE)

Benteng Zou

Centre de Recherche en Économie Appliquée (CREA)

Date Written: June 23, 2013

Abstract

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. 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 sufficiently 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.

Keywords: thresholds, endogenous preferences, environmental quality, policy intervention

JEL Classification: Q28, Q56

Suggested Citation

Schumacher, Ingmar and Zou, Benteng, Threshold Preferences and the Environment (June 23, 2013). Institute of Mathematical Economics Working Paper No. 484, Available at SSRN: https://ssrn.com/abstract=2289995 or http://dx.doi.org/10.2139/ssrn.2289995

Ingmar Schumacher

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE) ( email )

34 Voie du Roman Pays
B-1348 Louvain-la-Neuve, b-1348
Belgium

Benteng Zou (Contact Author)

Centre de Recherche en Économie Appliquée (CREA) ( email )

Campus Limpertsberg
162A, avenue de la Faïencerie
Luxembourg, 1511
Luxembourg

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