Stochastic Hyperbolic Discounting: An Application to an Environmental Dynamic Game

Abstract

We study the infinite horizon emissions and stock of pollution choices of time-inconsistent individuals by incorporating the stochastic hyperbolic preferences of Harris and Laibson (2013), later extended by Zou et al. (2014), into the environmental dynamic game pro-posed by Jørgensen et al. (2003) with linear-state structure. We derive analytic solutions for optimal emissions and stock of pollution selections for sophisticated individuals and extend the results with a sensitivity analysis of the stochastic hyperbolic parameters and their impact on the economy. Compared to the results of Jørgensen et al., we find that the stochastic hyperbolic discounting model increases the emissions rates and the stock of pollution, concretely, in the case in which agents are highly impatient.