The impact of green preferences on the relevance of history versus expectations

Andreas Schaefer, Anna Stuenzi

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Abstract

In an overlapping generations 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 transitions 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 of selecting 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 to clean production more quickly. Due to their optimism, the likelihood of reaching the superior stable steady state increases.

Original languageEnglish
Pages (from-to)1-25
Number of pages25
JournalEnvironment and Development Economics
Early online date18 Jun 2019
DOIs
Publication statusE-pub ahead of print - 18 Jun 2019

Keywords

  • Endogenous taxation
  • Expectations
  • Green preferences
  • Multiple equilibria

ASJC Scopus subject areas

  • Development
  • Environmental Science(all)
  • Economics and Econometrics

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