Now or Never: Environmental Protection under Hyperbolic Discounting

In this paper, we extend the well known result that hyperbolically discounting agents tend to postpone costs into the future. In a simple model we show that, without commitment to the ex ante optimal plan, no investment in environmental protection is undertaken over the whole time horizon, no matter whether the decision makers are naive or sophisticated, although investment seems optimal in the long run from every generations point of view. This result questions the application of hyperbolic discounting in cost-benefit analysis and gives rise to concern, as it is consistent with unsatisfactory policy performance in solving long-term environmental problems.