Exploiting common resources with capital-intensive technologies

Abstract

This paper focuses on the interactions between local communities having at least some degree of informal claims over natural resources and external agents, particularly firms interested in commercial resource exploitation. The paper makes three contributions to the existing literature. First, unlike the literature on devolution and communal resource management, rather than concentrating on intra-community decisions, we extend the analysis to examine interactions between the community and outside agents. Second, unlike both the literature on conflict and bargaining, we integrate these two strands of the literature, so that we can endogenously derive the conditions under which community-firm interactions result in conflict or, alternatively, in bargaining agreements. Third, to the best of our knowledge, this is the first study that formally models the endogenous participation by third parties that may attempt to support communities in the process. We show that, in a context of weak property rights, improvements in the community’s bargaining power <em>vis-á-vis</em> the firm are likely to increase resource extraction and thereby harm the environment. Moreover, an increase in the wage rate may increase or decrease resource extraction depending on initial conditions.