TIME INCONSISTENT RESOURCE CONSERVATION CONTRACTS

Sumeet Gulati () and James Vercammen

No 15838, Working Papers from University of British Columbia, Food and Resource Economics

Abstract: Are commonly observed resource conservation contracts efficient? In this paper we construct a model that embodies common characteristics of resource contracts. Using this model, we analyze a large class of real-world resource contracts and find them to be economically inefficient. This inefficiency stems from a time inconsistency inherent in these contracts. There are two possible ways to overcome this time inconsistency. The first is to employ a sufficiently large penalty for early termination of the contract. The second and possibly easier method is to offer an upward sloping conservation payment schedule so far overlooked by resource contracts. Under this payment schedule, the agent's ex-ante and ex-post contract choices coincide, social externalities are fully internalized, and the contractual outcome is economically efficient even in the absence of a penalty for early termination.

Keywords: Resource/Energy; Economics; and; Policy (search for similar items in EconPapers)
Pages: 26
Date: 2005
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https://ageconsearch.umn.edu/record/15838/files/wp050002.pdf (application/pdf)

Related works:
Journal Article: Time inconsistent resource conservation contracts (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:ubcwps:15838

DOI: 10.22004/ag.econ.15838

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