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A Theory of Price Caps on Nonrenewable Resources

Author

Listed:
  • Simon Johnson
  • Lukasz Rachel
  • Catherine Wolfram

Abstract

What is the optimal response of a resource exporter when a price cap is imposed on its main export? This paper develops a dynamic framework incorporating stochastic prices, financial frictions, and market power to study this novel tool of statecraft. With the right design, a price cap can incentivize increased extraction, stabilizing prices in the global market. But the stabilizing effects diminish when there is leakage outside the cap. Consequently, weak enforcement of the policy worsens the trade-off faced by the sanctioning policymaker. We provide a systematic approach to setting and enforcing an optimal cap level in these circumstances.

Suggested Citation

  • Simon Johnson & Lukasz Rachel & Catherine Wolfram, 2026. "A Theory of Price Caps on Nonrenewable Resources," American Economic Review, American Economic Association, vol. 116(7), pages 2711-2753, July.
    • Handle: RePEc:aea:aecrev:v:116:y:2026:i:7:p:2711-53
    DOI: 10.1257/aer.20250064
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    More about this item

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F51 - International Economics - - International Relations, National Security, and International Political Economy - - - International Conflicts; Negotiations; Sanctions
    • L71 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Mining, Extraction, and Refining: Hydrocarbon Fuels
    • P28 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - Natural Resources; Environment
    • P33 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - International Trade, Finance, Investment, Relations, and Aid
    • Q35 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Hydrocarbon Resources

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