Oxford Economic Papers Advance Access originally published online on February 15, 2005
Oxford Economic Papers 2005 57(3):497-521; doi:10.1093/oep/gpi020
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© Oxford University Press 2005; All rights reserved
Natural-resource exploitation with costly enforcement of property rights
Department of Economics, University of Ottawa, 200 Wilbrod Street, Ottawa, K1N 6N5, Canada; e-mail: lhott3{at}uottawa.ca
A model of resource exploitation when private ownership requires costly enforcement is developed. Enforcement costs are endogenized as the outcome of a game between a resource owner and illegal extractors. I find that two instruments are used to deter illegal extraction: policing efforts and purposeful ‘overexploitation’ of the resource. The latter works by reducing the returns from illegal activities. Hence, even with private ownership, the marginal product of a resource worker may be below his marginal product in alternative employment. Conditions are found for which at low wage rates, further wage reductions lower profits. Those conditions are necessary and sufficient for the existence of a range of low wages characterized by a free-access equilibrium. This may explain the more frequent prevalence of free access in less-developed countries. I show that higher resource prices will not lead to more free-access, but may lead to ‘value destruction’.
Key Words: JEL classification: D23 • K42 • O13 • Q20