Natural-Resource Exploitation with Costly Enforcement of Property Rights
U of Namur, Research Series Working Paper No. 234
30 Pages Posted: 12 Apr 2002
Date Written: March 2002
This paper proposes a model of natural-resource exploitation when private ownership requires costly enforcement activities. Enforcement costs are endogenized as the outcome of a game between the owner of a resource and encroachers. In equilibrium, the analysis suggests that in order to deter encroachment, two instruments are available for the owner: she can either devote more efforts in directly enforcing her property rights, or she can purposefully "overexploit" the resource as a means of lowering the returns from encroachment activities. The latter instrument implies that, even with the institution of private property, the marginal social yield of a resource worker may be below the value of his marginal product in alternative employment. Conditions are found for which at low wage rates, further wage reductions actually lower profits. These conditions turn out to be necessary and sufficient for the existence of a range of low wages characterized by a free-access equilibrium. This provides some clues as to why free access may be more prevalent in less-developed countries for certain types of resources. It is also shown that an increase in resource price cannot lead an owner to abandon his site to a free-access exploitation.
Keywords: property rights, free access, enforcement costs, natural resources, income levels, economic development, economics of crime, illegal labor
JEL Classification: D23, K42, O13, Q20
Suggested Citation: Suggested Citation