A dynamic game of status-seeking with public capital and an exhaustible resource

Abstract

This paper explores the link between status-seeking and the exploitation of a common property exhaustible resource. The extracted resource is an input in the production of a final good. The other input is man-made capital, which is a second state variable. Extraction requires efforts. Economic agents derive utility not only from absolute consumption, but also from relative consumption, because the latter is a signal of relative status. We consider a differential game involving n infinitely lived agents. We compare the Markov-perfect Nash equilibrium of this game with the outcome under cooperation. We find that the degree of status-consciousness has important impact on the Markov-perfect Nash equilibrium. A higher degree of status-consciousness leads to greater excessive consumption, and lower capital accumulation. If extraction is costless, status-consciousness has no impact on the extraction/resource-stock ratio. However, with costly extraction, higher status-consciousness reduces this ratio. Copyright © 2009 John Wiley & Sons, Ltd.