The cost of the status quo: Exploration or innovation in the face of scarcity

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Abstract: 
We explore incentives to opt for one of two solutions to nonrenewable resource scarcity when the resource is essential in production: exploration and opening up of additional sources, versus innovation in an alternative ’backstop’. We characterize equilibrium dynamics with either ex- ogenous backstop introduction or exogenous exploration, and both endogenous exploration and backstop innovation. We find that a transition to the backstop can be preferred even if the backstop is costly, i.e., if the steady-state utility under the nonrenewable strictly exceeds backstop utility. Due to the presence of multiple regimes and corresponding dynamics, the relationship between resource scarcity and exploration can be both positive or negative.