Dynamic resource management under weak property rights: A tale of thieves and trespassers

We study non-renewable resource extraction when institutions weakly protect the resource owner’s property rights. First, weak wealth protection exposes the stock in the ground to trespassing. Second, weak income protection exposes revenues from extraction to theft. In our dynamic framework with strategic interactions, the strength of wealth and income protection evolves over time. The weak protection of wealth results in excessive depletion due to the common pool externality. Anticipated changes in institutional strength further distort depletion. A resource user (i.e., owner or trespasser) is less rapacious when she anticipates favorable institutional changes. However, a given change in institutional strength may be favorable for some but detrimental for another resource user. Under these conflicting interests, the anticipation of better wealth protection might result in less efficient extraction. More generally, our results indicate that unstable institutions limit the benefits derived from resource ownership and thus constitute a challenge to the efficient management of non-renewable resource riches in weakly institutionalized economies.