The Road to Extinction: Commons With Capital Markets

Abstract

We study extinction in a commons problem in which agents have access to capital markets. When the commons grows more quickly than the interest rate, multiple equilibria are found for intermediate commons endowments. In one of these, welfare decreases as the resource becomes more abundant, a `resource curse'. As marginal extraction costs become constant, market access instantly depletes the commons. Without markets - the classic environment - equilibria are unique; extinction dates and welfare increase with the endowment. When the endowment is either very abundant or very scarce, market access improves welfare. As marginal costs of extraction from the commons become constant, market access can reduce welfare if the subjective discount rate exceeds the interest rate.

Keywords: commons, capital markets, perfect foresight, extinction, resource curse, storage

JEL Classification: C73, D91, O17, Q21