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Abstract

Use of public natural resources for private gain is a longstanding, hotly contested politicaleconomic issue across the world. Publicly owned natural resources generate social benefits beyond private commodity uses and exploitation – recreational, environmental, ecological, biological, preservation and conservation, existence values, and aesthetics. The dynamics of natural resource use and exploitation leads to asymmetric information on the actions taken to exploit resource, the stock levels of resources, and net benefit flows to society. Imperfect and costly monitoring and enforcement in a continuous time setting lead to new questions, results, and insights. We model this as a countable sequence of dynamic sub-games. Each sub-game is played in continuous time for a random length of time between monitoring events with an infinite support. Each subgame has three players: a public natural resource administrator, the principle; a private commodity user, the agent; and nature, which serves to draw a random agent from a measure space of potential commodity uses at the beginning of each sub-game and to draw the random time between sequential monitoring events. These are not repeated games, even in a stationary long-run equilibrium distribution context. An interior solution is obtained for the optimal monitoring rate and penalty function in the event of noncompliance. Several new results are obtained that, on the surface, appear to be somewhat surprising, perhaps even contrary to standard results on regulation and externalities in commodity use. The results relate to, extend, and connect several strands of the existing literature – including efficiency wages, crime and punishment, environmental regulation, and dynamic games.

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