Optimal Interventions in Coupled-Activity Network Games: Application to Sustainable Forestry

TL;DR

This paper develops a network game model to design optimal pricing policies that incentivize sustainable forestry practices, balancing economic welfare and environmental constraints, with solutions applicable to real-world policy-making.

Contribution

It introduces a novel framework combining network game theory and sustainability incentives, providing closed-form solutions and a new centrality measure for policy targeting.

Findings

Optimal pricing strategies can improve welfare and reduce unsustainable practices simultaneously.

Closed-form solutions are derived for realistic scenarios with uniform pricing and penalties.

A new node centrality measure identifies key agents influencing sustainability outcomes.

Abstract

We address the challenge of promoting sustainable practices in production forests managed by strategic entities (agents) that harvest agricultural commodities under concession agreements. These entities engage in activities that either follow sustainable production practices or expand into protected forests for agricultural growth, which leads to unsustainable production. Our study uses a network game model to design optimal pricing policies that incentivize sustainability and discourage environmentally harmful practices. Specifically, we model interactions between agents, capturing both intra-activity (within a single production activity) and cross-activity (between sustainable and unsustainable practices) influences on agent behavior. We solve the problem of maximizing welfare while adhering to budgetary and environmental constraints - particularly, limiting the aggregate level of unsustainable effort across all agents. Although this problem is NP-hard in general, we derive closed-form solutions for various realistic scenarios, including cases with regionally uniform pricing and the use of sustainability premiums or penalties. Remarkably, we find that it is possible to achieve both welfare improvement and reduction in unsustainable practices without reducing any agent's utility, even when there is no external budget for increasing premiums. We introduce a novel node centrality measure to identify agents whose decisions most influence aggregate unsustainable effort. Empirical validation confirms our theoretical findings, offering actionable insights for policymakers aiming to promote sustainable resource management in agricultural commodity markets. Our work has broader implications for addressing sustainability challenges in the presence of network effects, offering a framework for designing incentive structures that align economic objectives with environmental stewardship.