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Markov Perfect Equilibria in Differential Games with Regime Switching Strategies

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Listed:
  • Ngo Van Long
  • Fabien Prieur
  • Klarizze Puzon
  • Mabel Tidball

Abstract

We propose a new methodology exploring Markov perfect equilibrium strategies in differential games with regime switching. We develop a general game with two players. Players choose an action that influences the evolution of a state variable, and decide on the switching time from one regime to another. Compared to the optimal control problem with regime switching, necessary optimality conditions are modified for the first-mover. When choosing her optimal switching strategy, this player considers the impact of her choice on the other player's actions and consequently on her own payoffs. In order to determine the equilibrium timing of regime changes, we derive conditions that help eliminate candidate equilibrium strategies that do not survive deviations in switching strategies. We then apply this new methodology to an exhaustible resource extraction game.

Suggested Citation

  • Ngo Van Long & Fabien Prieur & Klarizze Puzon & Mabel Tidball, 2014. "Markov Perfect Equilibria in Differential Games with Regime Switching Strategies," CEEES Paper Series CE3S-03/14, European University at St. Petersburg, Department of Economics.
    • Handle: RePEc:eus:ce3swp:0314
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    1. Raouf Boucekkine & Aude Pommeret & Fabien Prieur, 2013. "Technological vs. Ecological Switch and the Environmental Kuznets Curve," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 95(2), pages 252-260.
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    5. Prieur, Fabien & Tidball, Mabel & Withagen, Cees, 2013. "Optimal emission-extraction policy in a world of scarcity and irreversibility," Resource and Energy Economics, Elsevier, vol. 35(4), pages 637-658.
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    Cited by:

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    2. Dmitry Gromov & Ekaterina Gromova, 2017. "On a Class of Hybrid Differential Games," Dynamic Games and Applications, Springer, vol. 7(2), pages 266-288, June.

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    More about this item

    Keywords

    differential games; regime switching strategies; technology adoption; non-renewable resources;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • Q32 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Exhaustible Resources and Economic Development

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