Endogenous First-Possession Property Rights in Open-Access Resources

Author:Bryan Leonard & Gary D. Libecap
Position:Ph.D. Candidate/Professor, Economics Department and Bren School of Environmental Science and Management, University of California, Santa Barbara
Pages:2457-2478
SUMMARY

This Essay examines the emergence of spontaneous claims to inframarginal rents in open-access resources. Although early models of openaccess in economics predicted 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 has been recognized in the ... (see full summary)

 
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2457
Endogenous First-Possession Property
Rights in Open-Access Resources
Bryan Leonard & Gary D. Libecap
ABSTRACT: This Essay examines the emergence of spontaneous claims to
inframarginal rents in open-access resources. Although early models of open-
access in economics predicted 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 has been recognized in the literature, but agents’ 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. The Essay then applies this framework to historical
experiences in oil and gas and fisheries.
Ph.D. Candidate, Economics Department and Bren School of Environmental Science
and Management, University of California, Santa Barbara.
 Professor, Economics Department and Bren School of Environ mental Science and
Management, University of California, Santa Barbara; National Bureau of Economic Research.
The research support for analysis of inframarginal rents to claimants of natural resources,
including water, fisheries, oil, and land was provided by the Earhart Foundation and the Walton
Family Foundation.
2458 IOWA LAW REVIEW [Vol. 100:2457
I. INTRODUCTION ........................................................................... 2458
II. ANALYTICAL FRAMEWORK ........................................................... 2460
A. SOURCES OF INFRAMARGINAL RENTS IN OPEN-ACCESS ............. 2460
B. STRATEGIES TO DEFEND INFRAMARGINAL RENTS—THE
SPONTANEOUS EMERGENCE OF DE FACTO PROPERTY
ARRANGEMENTS .................................................................... 2462
C. CHALLENGES IN TRANSITIONING TO DE JURE PROPERTY
RIGHTS ................................................................................. 2465
III. THE FRAMEWORK APPLIED .......................................................... 2467
A. OIL AND GAS ......................................................................... 2467
1. Nature of the Resource and Potential for Open-
Access ........................................................................... 2467
2. Characteristics of Claimants and Existence of
Inframarginal Rents .................................................... 2469
3. Nature of Spontaneous Property Rights .................... 2469
4. Formal and Informal Attempts to Rationalize .......... 2470
B. FISHERIES ............................................................................. 2473
1. Nature of the Resource and Potential for Open-
Access ........................................................................... 2473
2. Characteristics of Claimants and Existence of
Inframarginal Rents .................................................... 2474
3. Nature of Spontaneous Property Rights .................... 2475
4. Formal and Informal Attempts to Rationalize .......... 2475
IV. CONCLUSION .............................................................................. 2478
I. INTRODUCTION
Losses of competitive entry and production in open-access resources have
long been recognized.1 In the absence of formal property rights, there are no
restrictions on entry, and agents do not bear the full costs of their production
decisions. Classic externalities arise with the use of excessive capital, other
inputs, short-time horizons, races to produce, congestion, reduced investment
in the resource stock, and lower output value. To mitigate these externalities,
governments implement various regulatory and rights-based instruments to
constrain entry, limit output, and internalize external costs. We are interested
in a particular set of institutions that establish a total resource extraction cap
and then distribute shares of the resource or resource rents to individual
1. See H. Scott Gordon, The Economic Theory of a Common-Property Resource: The Fishery, 62 J.
POL. ECON. 124, 130–32 (1954) (outlining the situation in fisheries as iconic open-access
resources); Garrett Hardin, The Tragedy of the Commons, 162 SCIENCE 1243, 1244–48 (1968)
(describing the problem more broadly).

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