Bargaining over Natural Resources: Governments between Environmental Organizations and Extraction Firms

In this article, we propose a sequential Nash bargaining solution and apply it to a dynamic bargaining game on exhaustible-resource extraction. The government and two agents bargain via the asymmetric Nash bargaining solution. Should the trilateral negotiation fail, the government chooses one agent for a bilateral negotiation. In this negotiation, the disagreement point is to bargain with the other agent. Finally, should this second bilateral negotiation break down, the government chooses the welfare maximizing policy. In our dynamic bargaining game, the environmental organization is willing to pay for less extraction, because of stock-pollution effects, while the extraction firm is willing to pay for extraction per se. The government dislikes extraction, because of flow-pollution effects, but is willing to accept some if it is paid for it. It turns out that the disagreement point in the trilateral negotiation is always to bargain with the environmental organization. This is because there is no conflict of interest between the government and the environmental organization concerning extraction. However, as long as stock pollution is still low, it might be optimal for the environmental organization to let this bilateral negotiation break down. We demonstrate how these considerations shape the payments in case of agreement and disagreement, in total and over time.