Governing the Resource strongScarcitystrong-Induced Institutional Change.pdf

Governing the Resource: Scarcity-Induced Institutional Change Abstract This paper provides a dynamic model of natural resource management where the institutional structure that governs resource use changes optimally with resource depletion. Copeland and Taylor (2009) analyze how characteristics of a natural resource determine whether its steady- state management regime is open access, communal property, or private property. We extend this and other studies on endogenous institutions to analyze how and when resource governance may change on the transition path to the steady state, taking into account the fixed costs of institutional change and the variable costs of enforcement and governance. Assuming that governance cost is increasing in the difference between open-access and the actual harvest, we show that open access can be optimal if the resource is abundant relative to its demand or if governance costs are high. Once open access is rendered inefficient due to increased resource scarcity, further depletion may justify institutional change. Given the cost of institutional change, optimal resource use implies non-monotonic resource dynamics. These findings explain the co- evolution of resource scarcity and property rights — from open access to common property and beyond. We also extend the Demsetz-Taylor theory that price induced scarcity may or may not be sufficient to induce institutional change by adding dynamics to the steady state conditions of Taylor (2008). Key words: institutional change; property rights; renewable resources; resource governance JEL Codes: D23, O13, Q20. 1. Introduction A variety of institutional forms exists for the management of natural resources around the world, ranging from open access (no property), common property, private property, and state property. A large body of literature in institutional and resource economics has emerged to explain why diff