Ownership Risk and the Use of Common-Pool Natural Resources

Abstract:     
It has long been recognized that the quality of property rights greatly impacts the economic development of a country and the use of its natural resources. Since Long (1975), the conventional wisdom has been that ownership risk induces a firm to overuse the stock of a resource. However, the empirical evidence is mixed. In particular, Bohn and Deacon (2000) finds that weak property rights have an ambiguous effect on present extraction. We provide a theoretical model supporting these mixed observations in a common-pool resource environment. We show that if ownership risk includes a risk of expropriation in which the identities of the excluded firms are unknown ex ante, then the present extraction of all firms may decrease along with a higher risk of expropriation. The elasticity of demand for the resource is key in explaining the effect of ownership risk on present extraction

Number of Pages in PDF File: 38

Keywords: Common-pool resource, Expropriation, Extraction behavior, Ownership risk, Property rights, Tragedy of the commons

JEL Classification: D21, D23, D92, Q30

working papers series