Environmental difensive expenditures, expectations and growth

Nowadays many agents meet defensive expenditures to protect themselves against environmental deterioration. Such expenditures may contribute to support economic growth. Environmental degradation, in fact, may induce agents to work harder to replace depleted environmental goods with substitute goods. The consequent rise in the activity level may further deplete the environment, worsening the agents’ expectations on the future environmental quality and increasing their demand for substitute goods. To examine this issue, we adopt a simple model in which agents formulate expectations on the future environment that can be right or wrong and examine how such expectations influence capital accumulation and growth.