Cooperative and Noncooperative Extraction in a Common Pool with Habit Formation

Abstract

The present paper considers the exploitation of a common-property, nonrenewable resource, by individuals subject to habit formation. We formalize their behavior by means of a utility function, depending on the difference between the individuals’ current consumption and the consumption level which they aspire, the latter being a weighted average of past consumptions in the population. We derive and compare the benchmark cooperative solution and a noncooperative Markov-perfect Nash equilibrium of the differential game. We investigate how the intensity, persistence and initial level of habits shape the cooperative and noncooperative solutions. We prove that habit formation may either mitigate or worsen the tragedy of the commons.