Ownership risk and the use of common-pool natural resources

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 [13], 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 [1] find 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.

► We model two firms exploiting a common-pool resource under ownership risk. ► Ownership risk includes a risk of expropriation in which the identities of the excluded firms are unknown ex ante. ► We examine changes in the likelihood of ownership risk on extraction. ► Present extraction of all firms may decrease along with a higher risk of expropriation.