The Impact of Green Preferences on the Relevance of History Versus Expectations

Abstract

In an OLG model with multiple steady states we analyse the impact of endogenous environmental policies on the relevance of history and expectations for the equilibrium selection. In a polluting regime environmental preferences cause an increasing energy tax which raises the risk that the economy transits to the inferior equilibrium under pessimistic expectations. However, higher environmental preferences imply an earlier switch to the clean energy regime. Then, the conflict between production and environmental preferences is resolved and the prospects to select the superior equilibrium improve, since positive expectations become more relevant. In an empirical analysis we find that people with environmental preferences tend to have more optimistic expectations about economic development. Using these findings to analyse the steady state dynamics implies that agents with environmental preferences support higher energy taxes and switch faster to clean production. Due to their optimism, the likelihood to reach the superior stable steady state increases.