, Volume 31, Issue 2, pp 225-254
Date: 01 Jun 2006

The Commons with Capital Markets

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Abstract

We explore a dynamic commons problem and assess the welfare consequences of access to capital markets. The commons has a high intrinsic rate of return but its fruits cannot be secured by individual agents. Capital market access allows resources to be held securely and intertemporally transferred, but at a lower rate of return. In a two period model, we completely characterise symmetric consumption and extraction behaviour in four environments: under a strategic and a competitive equilibrium concept, and with and without market access. Strategic equilibria dominate competitive ones: while agents disagree over how to divide the resource, all would prefer it to be larger; the strategic concept allows them to anticipate returns to their conservation. As the number of agents becomes infinite, the strategic outcome converges to the competitive; as the number of agents falls to one, it converges to the planner’s. Market access has a positive effect on welfare owing to its consumption and extraction smoothing properties and a negative effect owing to its creation of an outside option to the commons, encouraging its depletion. A sufficient condition for autarky to dominate market access for some levels of communal endowment is that the world market discount factor exceed the subjective discount factor. Multiple equilibria may arise: these result from market access, not the equilibrium concept.

The authors thank Ralph Bailey, Siddhartha Bandyopadhyay, Matthew Cole, Carl Devore, Felix Kubler, Chirantan Ganguly, Martin Jensen, Indrajit Ray, Celine Rochon, Dave Rusin, participants at the Royal Economic Society 2005 and an anonymous referee for valuable comments. They are grateful for funding under the ESRC’s World Economy and Finance programme (RES-156-25-0022).