Department of Economics and Business Economics

The Optimal Extraction of Non-Renewable Resources under Hyperbolic Discounting

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In this paper, we investigate the effects of a declining social discount rate (SDR) on the optimal extraction of non-renewable resources and economic growth. For this purpose, we introduce time-consistent hyperbolic utility discounting into models of resource extraction. First, we investigate a small model of pure resource extraction holding constant the magnitude of discounting for hyperbolic and exponential discounting. We show that resource use is more conservative under hyperbolic discounting resulting in a permanently higher resource stock. Second, we introduce hyperbolic discounting into the seminal Dasgupta-Heal-Solow-Stiglitz (DHSS) model and derive analytically that positive long-run consumption growth requires a lower rate of technological progress under hyperbolic discounting. We show numerically that resource use is more conservative under hyperbolic discounting in the medium- and long-run.
Original languageEnglish
Place of publicationAarhus
PublisherInstitut for Økonomi, Aarhus Universitet
Number of pages31
Publication statusPublished - Dec 2020
SeriesEconomics Working Papers

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ID: 201850163