Time-consistent resource management with regime shifts

We investigate how a resource user who is present-biased manages a renewable resource stock with variable growth that could undergo a reversible regime shift (an abrupt, persistent change in structure and function of the ecosystem supplying the resource). In a discrete-time quasihyperbolic discounting framework with no commitment device, and using only generic utility functions and stock transition with regime shifts, we show that there is a unique, time-consistent stationary Markov-Nash equilibrium extraction policy. Further, we find that the optimal extraction policy is increasing in the resource stock and in the degree of present bias. Overall, our results
suggest that for characteristics of ecosystems commonly considered in the literature, presentbiased resource users will increase extraction when faced with regime shifts.

Keywords: Hyperbolic Discounting, Markov Equilibrium, Present bias, Regime shifts, Renewable resources, uncertainty

Arvaniti, M., A.-S. Crépin, and C. K. Krishnamurthy. 2019. Time-consistent resource management with regime shifts. CER-ETH Economics working paper series 19/329 Center of Economic Research, ETH Zurich, Switzerland.