Environmental Choices and Hyperbolic Discounting: An Experimental Analysis

Abstract

Environmental goods such as carbon abatement or green space development often generate benefit streams that may not occur until far into the future. How individual consumers value such amenities, therefore, depends critically on the discount rate. The usual assumption is that agents discount future values using constant, exponential rate, but there is some evidence from the lab suggesting that discount functions are more likely quasi-hyperbolic. We compare estimates of subjects’ rate of intertemporal time preference for financial rewards and environmental goods using multiple price-list and a new matrix multiple price list approaches. Our objective is to determine if discount functions for environmental and monetary goods differ, and to estimate the structure of discounting in both contexts. We find that financial discount functions are not hyperbolic, but those for environmental goods are. Discount rates for environmental goods are generally lower than for financial rewards, but are still above zero. Consumers, therefore, value long-lived environmental goods differently than financial goods.