Working Paper: CEPR ID: DP346
Authors: Larry Karp; David M. Newbery
Abstract: The current price of a depletable resource depends on future demands and supplies, which affect how rapidly the resource is exhausted. Plans for future levels of demand and supply can therefore affect the current price. If agents have market power and can commit to future plans, then such plans may be dynamically inconsistent, in that given an opportunity to revise those plans at some later date, they wish to deviate from the initial announcement. We survey cases in which such plans are dynamically inconsistent and discuss solution concepts such as Markov perfect equilibria, time consistent equilibria and feedback forms of open-loop equilibria. Different issues arise depending whether market power is on the supply side, or on the demand side.
Keywords: dynamic inconsistency; game theory; exhaustible resources; import tariffs
JEL Codes: 026; 422; 720
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| current price of a depletable resource (Q31) | future demand and supply conditions (J23) |
| future demand and supply conditions (J23) | current price of a depletable resource (Q31) |
| agents with market power (D43) | dynamic inconsistency in their plans (D84) |
| dynamic inconsistency in their plans (D84) | deviation from initial commitments (L14) |
| deviation from initial commitments (L14) | time-inconsistent equilibria (D52) |
| type of equilibrium (D50) | overall efficiency of resource extraction (L71) |
| type of equilibrium (D50) | distribution of rents (D33) |