In this article we study the implication of thresholds in preferences. To model

this we extend the basic model of John and Pecchenino (1994) by allowing the current

level of environmental quality to have a discrete impact on how an agent trades

off future consumption and environmental quality. In other words, we endogenize

the semi-elasticity of utility based on a step function. We motivate the existence

of the threshold based on research from political science, from arguments based on

regulation and standards, cultural economics as well as ecological economics.

Our results are that the location of the threshold determines both the potential

steady states as well as the dynamics. For low (high) thresholds, environmental

quality converges to a low (high) steady state. For intermediate levels it converges

to a stable p-cycle, with environmental quality being asymptotically bounded below

and above by the low and high steady state. We discuss implications for intergenerational

equity and policy making.

As policy implications we study shifts in the threshold. Our results are that, in

case it is costless to shift the threshold, it is always worthwhile to do so. If it is

costly to change the threshold, then it is worthwhile to change the threshold if the

threshold originally was sufficiently low. Lump-sum taxes may lead to a development

trap and should be avoided if there are uncertainties about the threshold or

the effectiveness of the policy.