Research by Assistant Professor Ling Huang and her co-author, Martin Smith has been accepted for publication in the American Economic Review.  The article, entitled “The Dynamic Efficiency Costs of Common-Pool Resource Exploitation” makes use of a dynamic game to understand the Common-Pool resource extraction.  Natural resources management is a dynamic problem by its nature. Economists have worked on this important area for a very long time in the context of optimal control theory. However, the theoretical framework is very hard to be directly applied to empirical quantification. Based on multiple generations of research, hinged on the data availability and recent methodological development in dynamic discrete choice modeling, this paper is novel in its use of real data and a comprehensive dynamic game framework to empirically quantify the effect of the “tragedy of the commons.” It is the first paper in the fishery field published in AER after three decades.

 

Abstract

We conduct the first empirical investigation of common-pool resource users’ dynamic and strategic behavior at the micro level using real-world data. Fishermen’s strategies in a fully dynamic game account for latent resource dynamics and other players’ actions, revealing the profit structure of the fishery. We compare the fishermen’s actual and socially optimal exploitation paths under a time-specific vessel allocation policy and find a sizable dynamic externality. Individual fishermen respond to other users by exerting effort above the optimal level early in the season. Congestion is costly instantaneously but is beneficial in the long run because it partially offsets dynamic inefficiencies.