26 August 2016









Serguei Kaniovski visited ASA, IIASA

Serguei Kaniovski (Austrian Institute of Economic Research (WIFO), Vienna) visited the Advanced System Analysis program on 26 August, 2016 and gave a talk on "The Optimal Use of Exhaustible Resources under Non-constant Returns to Scale" (joint work with Sergey Aseev (ASA) and Konstantin Besov (Steklov Mathematical Institute, Moscow, Russia)).  

Abstract

The 1972 Club of Rome's report on the `Limits to Growth' painted a gloomy future and led to an ongoing controversial debate. Essential ingredients of the rise and decline scenario were the rising resource scarcity and pollution. The central question was whether the scarcity of natural resources such as fossil fuels will limit growth and cause a substantial decline in standards of living. The report has been subject to utmost scrutiny by academics and journalists. Recent re-examinations lend credibility to the conclusions reached in the report.

Following publication of the report, a group of distinguished economists countered the scarcity argument in a series of papers now commonly referred to as the Dasgupta-Heal-Solow-Stiglitz (DHSS) model. Their effort resulted in a substantial theoretical contribution to the theory of economic growth and a standard model with resource constraints. One argument against the pessimism was that man-made capital can substitute the resource in making of consumption goods. This led to the concept of a weakly sustainable path (Hartwick), on which the expansion of man-made capital offsets the depletion of resources.

Despite extensive theoretical investigation, a complete analysis of the model has been presented only recently by Benchekroun and Withhagen for constant returns to scale. The centerpiece of the paper is a complete and rigorous study of the welfare-maximizing investment and depletion policies in the DHSS model under decreasing or increasing returns to scale. The non-constant returns to scale and constraints related to a finite stock of exhaustible resource preclude the application of Arrow’s sufficient optimality conditions - the standard approach to solving such models in economics.

This study follows a more general approach based on an existence theorem and necessary optimality conditions. We establish a general existence result and show that an optimal admissible policy may not exist if the output elasticity of the resource equals to one. Using an appropriate version of the maximum principle for infinite horizon optimal control problems, we are able to characterize the optimal policies for all possible model parameters and any initial stocks. We finish the paper with an economic interpretation and a discussion of the welfare-maximizing policies.


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Last edited: 19 September 2016

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