Welfare Implications of Leadership in a Resource Market under Bilateral Monopoly

Formulating a dynamic game model of a world exhaustible resource market, in this paper, we study welfare implications of Stackelberg leaderships for an individual country and the world. We overcome the problem of time‐inconsistency by imposing a ‘credibility condition’ on the Markovian strategy of the Stackelberg leader. Under this condition, we show that the presence of a global Stackelberg leader leaves the follower worse off relative to the Nash equilibrium. Moreover, the world welfare is highest in the Nash equilibrium as compared with the two Stackelberg equilibria.