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.
Similar content being viewed by others
References
Acemoglu D., Johnson S., Robinson J.A. (2001). The colonial origins of comparative development: an empirical investigation. Am Econ Rev 91(5):1369–1401
Benhabib J., Radner R. (1992). The joint exploitation of a productive asset: a game-theoretic approach. Econ Theory 2(2):155–190
Besley T., Burgess R. (2003). Halving global poverty. J Econ Perspect 17(3):3–22
Brooks R., Murray M., Salant S., Weise J.C. (1999). When is the standard analysis of common property extraction under free access correct? A game-theoretic justification for non-game-theoretic analyses. J Polit Econ 107(4):843–858
Bulte E.H., Horan R.D., Shogren J.F. (2003). Elephants: comment. Am Econ Rev 93(4):1437–1445
Clark C.W. (1973). Profit maximization and the extinction of animal species. J Polit Econ 81(4):950–961
Debreu G. (1952). A social equilibrium existence theorem. Proc Nat Acad Sci 38(10):886–893
Dockner E.J., Sorger G. (1996). Existence and properties of equilibria for a dynamic game on productive assets. J Econ Theo 71:209–227
Dutta, J., Rowat, C.: The road to extinction: commons with capital markets. Mimeo, March (2006)
Dutta P.K., Sundaram R.K. (1993a). How different can strategic models be?. J Econ Theory 60:42–61
Dutta P.K., Sundaram R.K. (1993b). The tragedy of the commons?. Econ Theory 3(3):413–426
Gaudet G., Moreaux M., Salant S.W. (2002). Private storage of common property. J Environ Econ Manage 43:280–302
Gordon H.S. (1954). The economic theory of a common-property resource: the fishery. J Polit Econ 62(2):124–142
Harris C., Reny P., Robson A. (1995). The existence of subgame-perfect equilibrium in continuous games with almost perfect information: a case for public randomization. Econometrica 63(3):507–544
Hoff K., Stiglitz J.E. (2004). After the big bang? Obstacles to the emergence of the rule of law in post-communist societies. Am Econ Rev 94(3):753–763
Homans, F.R., Wilen, J.E.: Markets and rent dissipation in regulated open access fisheries. mimeo, March 2001
Khovanskii, A.G.: Fewnomials. Number~88 in Translations of Mathematical Monographs. American Mathematical Society, 1991
Kremer M., Morcom C. (2000). Elephants. Am Econ Rev 90(1):212–234
Kremer M., Morcom C. (2003). Elephants: reply. Am Econ Rev 93(4):1446–1448
Levhari D., Mirman L.J. (1980). The great fish war: an example using a dynamic Cournot-Nash solution. Bell J Econ 11:322–334
Lipsey R.G., Lancaster K. (1956). The general theory of the second best. Rev Econ Stud 24(1):11–32
Mirman L.J.: Dynamic models of fishing: a heuristic approach. pp 39–73. Dekker, 1979
Mitrinović, D.S.: Analytic inequalities. Number 165 in Die Grundlehren der mathematischen Wissenschaften in Einzeldarstellungen. Springer-Verlag, 1970
Reinhart C.M., Rogoff K.S. (2004). Serial default and the “paradox” of rich-to-poor capital flows. Am Econ Rev 94(2):53–58
Roll, R., Talbott, J.: Why many developing countries just aren’t. Mimeo, 13 November 2001
Sonin K. (2003). Why the rich may favor poor protection of property rights. J Comp Econ 31(4):715–731
Sorger G. (1998). Markov-perfect Nash equilibria in a class of resource games. Econ Theory 11(1):79–100
Thirsk, J.: The agrarian history of England and Wales. vol. IV, 1500–1640, chapter Enclosing and Engrossing, pp. 200–255. Cambridge: Cambridge University Press (1967)
Topkis D.M. (1998). Supermodularity and complementarity Frontiers of economic research. Princeton University Press, Princeton
Tornell A., Lane P.R. (1999). The voracity effect. Am Econ Rev 89(1):22–46
Tornell A., Velasco A. (1992). The tragedy of the commons and economic growth: why does capital flow from poor to rich countries?. J Polit Econ 100(6):1208 – 1231
Vives X. (2005). Complementarities and games: new developments. J Econ Lit 43(2):437–479
Williamson J. (2000). What should the World Bank think about the Washington Consensus?. World Bank Res Obs 15(2):251–264
Author information
Authors and Affiliations
Corresponding author
Additional information
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).
Rights and permissions
About this article
Cite this article
Rowat, C., Dutta, J. The Commons with Capital Markets. Economic Theory 31, 225–254 (2007). https://doi.org/10.1007/s00199-006-0090-x
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s00199-006-0090-x