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A Two-Country Model of Renewable Resource Sharing

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Abstract

In this paper, I investigate the sustainability of optimal cooperative policies for the replenishment of a renewable resource shared by two countries. If the development of these nations constitutes a threat to the common stock, under what conditions can a social best (a Pareto optimum) be sustainable? The question is addressed within a two-country neo-classical growth model with externality. In the worst scenario, the poorer country leaves the replenishment burden to the rich. International transfers are then non-existent. Nevertheless, in absence of a commitment mechanism, it is still possible to reach a social best provided the countries' patience, expressed by their discount factor, is high enough. The strategies that implement these Pareto optima are self-enforcing trigger-strategies that involve positive transfers of wealth between countries and a threat to autarky in case of defection. Sustainable Pareto optima are then identified in a specific case of environmental resource (clean air) and for a calibration of the model economies to the United States and a country five times poorer. An estimate of the transfers required to implement these social optima is provided.

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Bibliographic Info

Paper provided by CREFE, Université du Québec à Montréal in its series Cahiers de recherche CREFE / CREFE Working Papers with number 41.

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Length: 23 pages
Date of creation: May 1996
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Handle: RePEc:cre:crefwp:41

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Keywords: Renewable resources; pollution; neo-classical growth model; sustainable Pareto optima;

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References

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  1. Dutta, P.K. & Sundaram, R.K., 1990. "Stochastic Games Of Resource Allocation: Existence Theorems For Discounted And Undiscounted Models," Discussion Papers 1990_07, Columbia University, Department of Economics.
  2. Marcet, Albert & Marimon, Ramon, 1992. "Communication, commitment, and growth," Journal of Economic Theory, Elsevier, vol. 58(2), pages 219-249, December.
  3. Stokey, Nancy L., 1991. "Credible public policy," Journal of Economic Dynamics and Control, Elsevier, vol. 15(4), pages 627-656, October.
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  8. Dutta, P.K. & Sundaram, R.K., 1990. "Stochastic Games Of Resource Allocation: Existence Theorems For Discounted And Undiscounted Models," RCER Working Papers 241, University of Rochester - Center for Economic Research (RCER).
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  12. Abreu, Dilip, 1988. "On the Theory of Infinitely Repeated Games with Discounting," Econometrica, Econometric Society, vol. 56(2), pages 383-96, March.
  13. Friedman, James W, 1971. "A Non-cooperative Equilibrium for Supergames," Review of Economic Studies, Wiley Blackwell, vol. 38(113), pages 1-12, January.
  14. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  15. Atkeson, Andrew, 1991. "International Lending with Moral Hazard and Risk of Repudiation," Econometrica, Econometric Society, vol. 59(4), pages 1069-89, July.
  16. Coleman, Wilbur John, II, 1990. "Solving the Stochastic Growth Model by Policy-Function Iteration," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(1), pages 27-29, January.
  17. Harris, Christopher J, 1985. "Existence and Characterization of Perfect Equilibrium in Games of Perfect Information," Econometrica, Econometric Society, vol. 53(3), pages 613-28, May.
  18. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  19. Huggett, Mark, 1993. "The risk-free rate in heterogeneous-agent incomplete-insurance economies," Journal of Economic Dynamics and Control, Elsevier, vol. 17(5-6), pages 953-969.
  20. Jess Benhabib & Aldo Rustichini, 1991. "Social Conflict," Discussion Papers 937, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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Cited by:
  1. Pallage, Stephane & Zimmermann, Christian, 2007. "Buying out child labor," Journal of Macroeconomics, Elsevier, vol. 29(1), pages 75-90, March.

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