Year: 2016
Type: article
Abstract: There is a considerable body of evidence from behavioural economics and statedpreference valuation showing that our preferences exhibit both reference dependence and loss aversion, a.k.a. the endowment effect.In this paper we consider the implications of the endowment effect for discounting future improvements in the environment.We show that the endowment effect modifies the discount rate by introducing (i) an instantaneous endowment effect and (ii) a reference-level effect.Moreover we show that these two effects mostly combine to dampen our usual preference to smooth consumption over time.However, what this implies for our willingness to pay for future environmental improvements may depend critically on whether environmental quality is merely a factor of production of material consumption, or whether it is an amenity.On an increasing path of material consumption, the endowment effect mostly reduces the discount rate.On a declining path of environmental quality and where we derive utility directly from environmental quality, it mostly increases the discount rate.On non-monotonic paths the endowment effect can give rise to substantial discontinuities in the discount rate.
Source: ORBi UMONS
Authors: Simon Dietz, Frank Venmans
Language: English
Subfield: Economics and Econometrics
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W2338064813