Resource extraction and land-use choice in a two-player two-period game

Land use is an important driver for irrigation but rarely included in models of renewable resource economics. We set up a dynamic twoperiod model in which farmers decide on both land-use and water-use, while extracting from a common groundwater resource. We compute the Nash feedback equilibrium and the common property optimal solution, for symmetric and heterogeneous players. We first study the case where only water is a decision variable and then the case where water and land-use are decision variables, characterizing the intensive and extensive margins. We show that under Nash, in contrast to the optimal policy, more water is extracted than optimal, but more importantly, greater surfaces are irrigated and more water is extracted in the first period than in the second, showing the effect of strategic competition. We show in an example how regulating land-use may be a Pareto-improving policy and that not regulating it increases the difference between optimal and Nash gains, questionning the Gisser-Sanchez effect.