Optimal Recovery of a Shared Resource Stock

Working Papers 57 Kaitala Veijo and Pohjola Matti

This paper considers optimal two-country management of depleted transboundary renewable resources. Transfer or side payments are studied as a particular cooperative management program. Transfer payments allow one country to buy out the other from the fishery in the purpose of eliminating the inefficiency caused by the join acces to the resources. It is shown that efficient equililibria can be reached in a class of resource management games, which allow the use of memory strategies. These strategies permit an introduction of threats designed to sustain a particular, pre-agreed cooperative program. A threat is an agreement to return to noncooperative management of resources as soon as failures in observing the cooperative agreement occur. The credibility of the threats is guaranteed by their equilibrium property. The paper clarifies recent discussion on the inefficiency of multi-agent resource management and on the application of transfer payments as a regulation tool in resource management.