A discrete-time dynamic game of seasonal water allocation (Q850921)

Two players have opposite interests in the value of a state variable (water in the specific case at hand), which evolves deterministically, responding to exogenous forces plus the effect of the players' moves on its level. The authors show how the corresponding dynamic, non-stationary game can be solved, and compute numerical solutions for some parameters' values for which a version of uniqueness theorem of \textit{J. B. Rosen} [Econometrica 33, 520--534 (1965; Zbl 0142.17603)] may be applied. In the Nash equilibrium the players, in order to bring the state variable close to the desired values, make efforts of opposite signs which almost cancel each other out, with apparent waste of resources. To alleviate the problem the authors add a penalty term to the players' payoffs, thought of as an intervention of an external agent (Government). It is shown that for some parameter values a unique equilibrium still exists and the effort waste is reduced. On the other hand, some comparative analysis would be needed to ensure that the Government problem is well posed (as it would be the case e.g. if the waste decreases to zero with Gov's intervention spending, so that one could imagine an optimal intervention policy whereby marginal intervention cost would be equal to the marginal waste-reduction benefit).