Rapacious Resource Depletion, Excessive Investment and Insecure Property Rights: A Puzzle

Frederick (Rick) van der Ploeg

No 16, OxCarre Working Papers from Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford

Abstract: For a country fractionalized in competing factions, each owning part of the stock of natural exhaustible resources, or with insecure property rights, we analyze how resources are transformed into productive capital to sustain consumption. We allow property rights to improve as the country transforms natural resources into capital. The ensuing power struggle about the control of resources is solved as a non-cooperative differential game. Prices of resources and depletion increase faster than suggested by the Hotelling rule, especially with many competing factions and less secure property rights. As a result, the country substitutes away from resources to capital too rapidly and invests more than predicted by the Hartwick rule. The theory suggests that power struggle boosts output but depresses aggregate consumption and welfare, especially in highly fractionalized countries with less secure property rights. Also, adjusted net saving estimates calculated by the World Bank using market prices over-estimate welfare-based measures of genuine saving. Since our theory suggests that genuine saving is zero while empirically they are negative in resource-rich, fractionalized countries, we suggest ways of resolving this puzzle.

Keywords: Exhaustible resources; Hotelling rule; Hartwick rule; capital; sustainable consumption; fractionalization; seepage; interconnected pools; insecure property rights; differential game; genuine saving; adjusted net saving (search for similar items in EconPapers)
JEL-codes: E20 F32 O13 Q01 Q32 (search for similar items in EconPapers)
Date: 2009-01-20
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Journal Article: Rapacious Resource Depletion, Excessive Investment and Insecure Property Rights: A Puzzle (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:oxf:oxcrwp:016

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