Exhaustible Resource Allocation in an Overlapping Generations Economy

This paper analyzes competitive allocations of an exhaustible resource in an overlapping generations economy. Conditions are given for the existence of equilibrium extraction rules such that both extraction and investment in future stocks are increasing and continuous in the current stock. The paper then considers the time paths of equilibrium allocations and shows that there are economies where equilibrium resource extractions and prices exhibit nonclassical behavior. This is illustrated through a finite horizon example in which extractions increase and prices decrease over the entire time horizon and an infinite horizon example where there are persistent cycles in extractions and prices and multiple equilibria. The paper concludes by examining welfare issues.