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Threatening Thresholds? The effect of disastrous regime shifts on the cooperative and non-cooperative use of environmental goods and services

Listed author(s):
  • Diekert, Florian K.

    ()

    (Centre for Ecological and Evolutionary Synthesis, University of Oslo,)

This paper presents an analytically tractable dynamic game in which players jointly use a resource. The resource replenishes fully but collapses should total use exceed a threshold in any one period. The initial level of use is known to be safe. If it is at all optimal to increase resource use, the consumption frontier is pushed once. Moreover, it is shown that the degree of experimentation is decreasing in the safe value of resource use. Non-cooperative agents can take advantage of this feature and coordinate on a “cautious" equilibrium. If the status quo is sufficiently valuable, the threat of the regime shift induces the first-best. If the status-quo is not sufficiently valuable, experimentation will be inefficiently risky. But given that the threshold has not been crossed, the updated consumption frontier will, ex post, be socially optimal. However, there is also a pareto-inferior, “aggressive" equilibrium in which the resource is depleted immediately. Under some conditions, immediate depletion is a self-fulfilling prophecy, although the social optimum is to sustain the resource indefinitely. Closed-form solutions are provided for a specific example and it is shown that the pareto-superior, “cautious" equilibrium is risk-dominant up to a high probability that the opponents play an aggressive strategy. The result that the threat of a disastrous regime shift allows the agents to coordinate on a pareto-superior equilibrium, because it only pays to search for the location of the threshold once, is robust to extensions that account for more general resource dynamics

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File URL: http://www.sv.uio.no/econ/english/research/unpublished-works/working-papers/pdf-files/2015/memo-12-2015.pdf
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Paper provided by Oslo University, Department of Economics in its series Memorandum with number 12/2015.

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Length: 35 pages
Date of creation: 11 Jun 2015
Handle: RePEc:hhs:osloec:2015_012
Contact details of provider: Postal:
Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway

Phone: 22 85 51 27
Fax: 22 85 50 35
Web page: http://www.oekonomi.uio.no/indexe.html
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  1. Reyer Gerlagh & Matti Liski, 2014. "Carbon Prices for the Next Hundred Years," CESifo Working Paper Series 4671, CESifo Group Munich.
  2. Anne-Sophie Crépin & Therese Lindahl, 2009. "Grazing Games: Sharing Common Property Resources with Complex Dynamics," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 44(1), pages 29-46, September.
  3. Costello, Christopher & Karp, Larry, 2004. "Dynamic taxes and quotas with learning," Journal of Economic Dynamics and Control, Elsevier, vol. 28(8), pages 1661-1680, June.
  4. Olivier Bochet & Jeremy Laurent-Lucchetti & Justin Leroux & Bernard Sinclair-Desgagné, 2013. "Collective Dangerous Behavior: Theory and Evidence on Risk-Taking," Research Papers by the Institute of Economics and Econometrics, Geneva School of Economics and Management, University of Geneva 13101, Institut d'Economie et Econométrie, Université de Genève.
  5. Aflaki, Sam, 2013. "The effect of environmental uncertainty on the tragedy of the commons," Games and Economic Behavior, Elsevier, vol. 82(C), pages 240-253.
  6. Agbo, Maxime, 2014. "Strategic exploitation with learning and heterogeneous beliefs," Journal of Environmental Economics and Management, Elsevier, vol. 67(2), pages 126-140.
  7. Fesselmeyer, Eric & Santugini, Marc, 2013. "Strategic exploitation of a common resource under environmental risk," Journal of Economic Dynamics and Control, Elsevier, vol. 37(1), pages 125-136.
  8. Barrett, Scott, 2013. "Climate treaties and approaching catastrophes," Journal of Environmental Economics and Management, Elsevier, vol. 66(2), pages 235-250.
  9. Cropper, M. L., 1976. "Regulating activities with catastrophic environmental effects," Journal of Environmental Economics and Management, Elsevier, vol. 3(1), pages 1-15, June.
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