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

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).