Dynamic resource management under the risk of regime shifts

Hiroaki Sakamoto

Journal of Environmental Economics and Management, 2014, vol. 68, issue 1, 1-19

Abstract: This paper provides a framework through which a dynamic resource management problem with potential regime shifts can be analyzed both in a strategic environment and from a social planner׳s perspective. Based on a fairly general model, a condition for a precautionary policy is discussed. By applying the framework to a common-property resource problem with a linear production technology, we illustrate how the qualitative as well as quantitative nature of equilibrium is altered due to the possibility of regime shifts. In particular, when the risk is endogenously affected by the players׳ behavior, potential regime shifts can facilitate the precautionary management of resources as long as the resource stock is in good shape. As the stock of resource becomes scarce, however, the precautionary effect vanishes and more aggressive resource exploitation emerges. The impacts of irreversibility on the equilibrium behavior are highlighted. It is also shown that there can exist a resource-depletion trap in which a regime shift, once it happens, triggers a continuous decline of resource stock no matter which regime materializes in the subsequent periods.

Keywords: Regime shifts; Uncertainty; Irreversibility; Optimal management; Dynamic games (search for similar items in EconPapers)
JEL-codes: C61 C73 Q20 Q56 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (24)

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Working Paper: A dynamic common-property resource problem with potential regime shifts (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeeman:v:68:y:2014:i:1:p:1-19

DOI: 10.1016/j.jeem.2014.01.003

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