Endogenous First-Possession Property Rights in Open-Access Resources

This Essay examines the emergence of spontaneous claims to inframarginal rents in open-access resources. Although early models of open-access in economics predicated full rent dissipation as homogeneous agents exploited the resource, later theory and empirical observations indicated persistence of inframarginal rents. The existence of inframarginal rents under open-access had been recognized in the literature, but agent's incentives to invest in de facto institutions to protect rental streams from competitors has not been explored. These institutions include local property rights, specialized production, and restricted information sharing. Moreover, there has been no recognition of how these informal arrangements might contribute to observed resistance by inframarginal-rent earners to externally imposed schemes in order to reduce aggregate rent dissipation. Proponents are high-cost agents, who earn low or zero rents. High-cost agents ought to be able to compensate low-cost agents for a shift to a new property regime if the shift makes them better off than they were under open-access. Empirically, however, this appears not to happen and formal open-access persists. This Essay develops a simple framework to show why "willingness to pay" and "willingness to accept" do not overlap and that institutional change is not Pareto-improving for those who have adjusted well to open-access. If agents are heterogeneous in search and production costs, and the resource is large and heterogeneous in quality, then low-cost parties search for the most productive locations and apply their superior skills and develop human and physical capital to earn inframarginal rents. This Essay then applies this framework to historical experiences in oil and gas and fisheries.

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