Nonlinear dynamics and global indeterminacy in an overlapping generations model with environmental resources

• This paper considers an OLG model with environmental resources.
• The production activity of the private good deteriorates the environment.
• Local and global indeterminacy may emerge.

We analyse the dynamics of an economy formed of overlapping generations of individuals whose well-being depends on leisure, consumption of a private good and a free access environmental resource. The production activity of the private good deteriorates the environmental resource. Individuals may defend themselves from environmental degradation by increasing consumption of the private good, which may be perceived as a “substitute” for services provided by the environmental resource. However, the resulting increase in production and consumption of the private good generates a further increase in environmental deterioration leading economic agents to increase production and consumption of the private good itself. This substitution mechanism is clearly self-reinforcing and may fuel an undesirable economic growth process according to which an increase in consumption of the private good – and the resulting increase in Gross Domestic Product – is associated with a reduction in individuals’ well-being. The article shows the emergence of several global phenomena, and individuals’ expectations about the future evolution of the environmental quality can give rise to (local and global) indeterminacy about the growth path the economy will follow starting from a given initial position.