I INTERNATIONAL ANDEAN CONFERENCE AND III COLOMBIAN CONGRESS ON OPERATIONS RESEARCH

A Differential Game for Renewable Resource Extraction

Asymmetric Players and Asynchronous Horizons

Un juego diferencial para la estracción de recursos

renovables con agentes asimétricos y perspectivas

asincrónicas.

Luca Grilli
Dipartimento di Scienze Economiche, Matematiche e Statistiche,
Università degli Studi di Foggia,
Via IV Novembre 1, I-71100 Foggia, Italy
e-mail: l.grilli@unifg.it

Abstract:

In this paper we study a differential game, for resource extraction of a renewable good, in
which players are overlapping generations of extractors. The framework of overlapping
generation allows us to consider intragenerational (players in the same generation) and
intergenerational (players in different generations) game equilibrium. We consider the case in
which players, even if identical, face competition in an asymmetric way. Since we consider
overlapping generations, players have asynchronous horizons, in contrast with a number of
studies in intertemporal exploitation of resources in which players have identical time
horizons. We conclude by considering the case in which players compete in a leader-follower
way.

Extracto:

En este papel estudiamos un juego diferencial, para la extracción de un recurso reanudable,

en las cuales los jugadores son « overlapping generations » de extractores. El marco de la
« overlapping generations » permite que consideremos el equilibrio del juego
intragenerational (jugadores en la misma generación) y intergenerational (los jugadores en
diversas generaciones). Consideramos el caso en el cual los jugadores, uniformes si es
idéntico, competición de la cara de una manera asimétrica. Puesto que consideramos el
traslapar de las generaciones, los jugadores tienen horizontes asincrónicos, en contraste
con un número de estudios en la explotación intertemporal de los recursos en los cuales los
jugadores tienen horizontes idénticos del tiempo. Concluimos considerando el caso en el
cual los jugadores compiten de una manera del li'der-seguidor.

Keywords: Feedback Nash Equilibrium, resource extraction, overlapping generations,

asynchronous horizon, asymmetric players, Stackelberg differential game.

Subject Classification: 91A23, 49N90, 91A80.

Introduction

The problem of resource extraction activity is of great interest and is studied by mean of
many different approaches. From the pioneering work Levhari (1980), the game theoretic
approach counts a number of studies such as Kaitala (1993), Plourde (1989), JØrgensen
(1990, 1996, 1999), Fischer (1992), Clark (1980), Dockner (1989a, 1989b) (this is an
absolutely incomplete list).

Dealing with the problem of resource extraction of a natural resource in presence of

different extractors it is necessary to consider at least the two following features: competition
among extractors and intergenerational equity. In fact actions of present generations (in
terms of extraction rates) influence the choices of future generation in an obvious way.

Competition among extractors can be modelled with a game, but the framework of agents
with identical (finite of infinite) time horizon, that is the most used in literature, cannot deal
with the problem of intergenerational equity.

It is well known, among economists, that if extractors do not care about the effects of
their extraction policies on future levels of stock of resource this can result in the so called
“tragedy of commons'' Hotelling (1931), Pigou (1932) and Gordon (1954).

In Burton (1993) is studied the problem of intertemporal preferences and

intergenerational equity in a context of resource extraction, Mourmouras (1993) consider a
model with overlapping generations. Therefore, none of these papers use a game theoretical
approach.

J rgensen and Yeung (1999), for the first time, study a differential game in which players
are overlapping generations of extractors of a renewable good.

The framework of overlapping generations allows to consider the problem of

intergenerational equity and to introduce a differential game with asynchronous horizons.
This is a novelty in game theory.

It is necessary to define in a more details the concept of ``intergenerational equity''.

Rawls (1971) claims:

“...consider the question of justice between generations. There is no need to stress the
difficulties that this problem raises. It subjects any ethical theory to severe if not impossible
lest”

Solow (1986) consider the problem of a natural resource:

“ the current generation is always entitled to take as much resource out of the common
intertemporal pool as it can, provided only that it leaves behind the possibility to each
succeeding generation can be as well off as this one ''

It seems that, in an environmental context, with ``intergenerational equity'' we can mean

that the extraction strategies of present generations can satisfy their own needs and in the
same time guarantee to future generations to do the same.
 On the other hand, the overlapping generations framework introduce in the model the
presence of asynchronous horizons since players in different generation have different time
horizons.

In this paper, we consider the case in which players are not perfectly symmetric. It seems
natural to suppose that players in different generations, even if identical, do not compete in a
symmetric way. We suppose that older extractors have an advantage in extraction activity,
as a consequence, for instance, of a better technology (or more experience).

As we will show, the advantage in extraction activity compensate partially the difference
in marginal rent of young generations and old generations.

We suppose that extractors in different generations face different costs, in particular old
generations face lower costs than young generations.

The paper presents also the case in which competition among players happen in a
leader-follower way.

1 The Model

The model refers to Jorgensen and Yeung (1999) and adapt it in the case of asymmetric
competition.
Consider an economy with a homogeneous good that is a single renewable resource and a
sequence of overlapping generations of extractors. Suppose that in each generation
there are identical individuals. The problem of extractor is to determine his extraction
rate , where and . The set of admissible extractions
rates for extractor in generation is . Let indicate the resource stock at time and
let suppose that if and if .
Each extractor has an economic life span (for the initial generation is ). Let indicate
the time in which generation is born; in the time interval players
in generation face competition with players in generation that are in the last part of
their economic life; in the time interval they compete, as an old generation,
with players (young) in generation .
The following equalities can make this dynamic more clear and will be useful later:
and . Generation , in the
last part of his life, when generation exit the game, is the only one generation in the
game. For the rest of the paper let consider only the case that is the most
relevant.
Let suppose that players face different costs according to which part of their economic life
they are living in. We define the cost functions for and
for .

If extractors in old generation face lower cost than young competitors.

 The resource extracted is a homogeneous good in a market with a price given by the
inverse demand curve .

The payoff of extractor in generation is:

where is a discount rate. We recall that the game begins in when

generation and generation co-exists.
Let be the stock size at time , the dynamics of the resource stock is ruled by:

(1)

Where function describes the dynamics of a renewable good. In general, pure

compensation hypothesis implies that the relative growth rate is decreasing in , and
for some .
When we consider the presence of extraction activity equation (1) becomes:

and

By considering the overlapping generation framework and the functional form of cost
function the game that successive generations have to solve can be divided into the following
two differential games, :
where and for ,
and the game :

where and for .

The games and , as we will show, are connected and cannot be solved
independently.

Under the assumption that extractors cannot use precommitted strategies since they do
not communicate among one another; each player has to adopt a decision rule that depends
on the current level of stock resource, so we look for Feedback Nash Equilibrium for the
games and .

Extractor in generation has to compete, in the first part of his economic life, as a
young extractor, with players in his generation and with players in generation ;
otherwise, in the second part of his life he competes, as an old extractor, with players in
generation (young generation). In this model the competition among players in different
generation is not perfectly symmetric as a consequence of different costs.

Each player adopts the feedback strategies for the game and for the
game . These strategies are continuous in and uniformly Lipschitz in for each .

Let denote the value functions, if they exist, with for and
for , with terminal condition . The hypothesis
is a natural condition since in that moment the old extractor exits the
game. In the time interval , there are extractors in
generation and extractors in generation , they all have to solve the problem:
s.t.

A set of strategies and is a Feedback Nash

Equilibrium for the two games is there exist the functions and which
satisfy the Hamilton-Jacobi-Bellman (HJB) equations (see Basar (1999)):
 In the time interval a set of strategies
and is a Feedback Nash Equilibrium for the two
game if there exist and which satisfy HJB equations:
2 The asymmetry in the game

In order to find an analytical solution of this problem it is necessary to assume some

functional form for , , and . In Grilli (2003) the
optimal strategies and for the two games are derived in the case of
different costs. As a result of the asymmetric competition the difference in marginal rent from
resource extraction are reduced. Player's optimal strategies depend both on value function of
extractors in same generation and on value function of extractors in different generation, so
competition is not only intragenerational but also intergenerational.

Another possibility to introduce an asymmetry in competition among young and old

extractor is to suppose that they do not have the same discount rate. Let suppose that when
extractors are in the second part of their life, near to exit the game, they have a discount rate
lower than young extractors. If we denote with the discount rate for young extractors and
with the discount rate for the old extractors, it is possible to define the games and in
the following way, :

where and for ,

and the game :

where and for .

If we look for the optimal strategies for such games, under the hypothesis in Grilli (2003),
it is evident how the difference in discount rates influences the value functions and
consequently the optimal strategies for extractors.

We conclude the paper introducing a different approach to the problem of asymmetry in

the game. We suppose that competition among extractors follows a leader-follower structure,
so we study a Stackelberg differential game in which players have asynchronous time
horizons. An important feature is that the leader-follower structure, by mean of the
overlapping generation framework, is not fixed but depends on the time period in which each
player is living in. We suppose that young players compete as followers with players in old
generation that are leaders. From the point of view of player in generation we have that if
than he competes as a follower with players in generation that are
leaders; if , than he competes as a leader with players in generation
that are followers. This is the first time that a Stackelberg differential game with
asynchronous horizons is studied.

The behaviour of the players can be of two ways: myopic or not myopic. We consider the
myopic behaviour as the behaviour of a player that solve the two games separately, in other
words he solve the game in the first part of his life (as a follower) without considering that in
the future he will be a leader, otherwise, players are not myopic if they solve the two games
as an unique game, so when they solve the game as follower they know that in the second
part of his life they will be leader.

3 Conclusions

In this paper we haveinvestigated two different approaches in order to introduce an

asymmetry in the differential game for resource extraction activity in which players are
overlapping generations of extractors. From one side we consider the asymmetry in the
competition among players with a differentiate cost structure or with different discount rates.
We show how the value functions depend on both intragenerational factors and
intergenerational, and we show that the difference in marginal resource rent is reduce for old
extractors. From the other side we introduce a leader-follower structure in the game. This is a
novelty in differential game theory in the case of overlapping generation model. We underline
the presence of two different behaviour, the myopic and the non myopic behaviour.

Acknowledgments

The author deeply thanks Prof. Lucia Maddalena for her precious comments and
suggestions.

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