STATUS-SEEKING AND EXHAUSTIBLE RESOURCE UNDER UNCERTAINTY

Abstract

This paper is to extend Katayama and Long (2010) to examine the effect of uncertainty on the optimal consumption and resource extraction paths when economic agents are status-seeking. We consider an economy endowed with an exhaustible natural resource and an artificially augmentable capital, both of which are accessible by each agent. The utility of an agent is derived not only from his/her own consumption level but from its relative position in consumption scale among the agents. The resource stock is subject to uncertainty and may increase by newly discovered reservoir or may decrease by, say, water immersion. Two types of uncertainty are modeled: continuous change in stock level over time and jumps in discrete interval of time. The introduction of uncertainty may counteract the property under Markov-perfect Nash equilibrium established by Katayama and Long (2010) that a higher degree of status-seeking leads to greater consumption than in the social optimum.