Natural-Resource Exploitation with Costly Enforcement of Property Rights

Posted: 29 Feb 2008

Multiple version iconThere are 2 versions of this paper

Date Written: July 2005

Abstract

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`.

JEL Classification: D23; K42; O13; Q20

Suggested Citation

Hotte, Louis, Natural-Resource Exploitation with Costly Enforcement of Property Rights (July 2005). Oxford Economic Papers, Vol. 57, Issue 3, pp. 497-521, 2005. Available at SSRN: https://ssrn.com/abstract=916833

Louis Hotte (Contact Author)

University of Ottawa ( email )

Department of Economics
55 Laurier E.
Ottawa, Ontario K1N 6N5
Canada
+161 356 25800 1692 (Phone)
+161 356 25999 (Fax)

HOME PAGE: http://aix1.uottawa.ca/~lhott3/

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