DYNAMIC OPTIMAL CONTROL OF OIL REVENUE ALLOCATION AND RENT-SEEKING UNDER FISCAL FEDERALISM: A STACKELBERG DIFFERENTIAL GAME ANALYSIS OF NIGERIA
DOI:
https://doi.org/10.5281/zenodo.20191573Keywords:
Stackelberg differential game, fiscal federalism, HJB equation, rent-seeking, Nigeria, oil revenue, dynamic moral hazardAbstract
This study develops a dynamic Stackelberg differential game framework to investigate the strategic interaction between the federal government and state governments in Nigeria's oil revenue allocation system under fiscal federalism. The federal government acts as the leader by determining extraction rates, intergovernmental transfers, and sovereign savings policies, while state governments act as followers by allocating received revenues between productive investments and rent-seeking activities. Using a coupled Hamilton-Jacobi-Bellman (HJB) formulation, the model characterizes the Markov-perfect Stackelberg equilibrium and derives optimal policy rules for federal transfers and state investments. The analysis reveals the existence of multiple dynamic regimes, including a high-development equilibrium and a corruption trap equilibrium, depending on transfer intensity, monitoring effectiveness, and derivation parameters. Results show that poorly conditioned transfers may induce dynamic moral hazard, increase corruption persistence, and weaken internally generated revenue incentives at the state level. Numerical simulations calibrated to Nigerian fiscal institutions demonstrate the long-run implications of FAAC reforms, anti-corruption enforcement, and derivation adjustments on welfare, inequality, and productive capital accumulation. The study provides mathematically rigorous and policy-relevant insights for ongoing reforms in Nigeria's fiscal architecture.
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