Endogenous first-possession property rights in open-access resources

I. INTRODUCTIONLosses 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 users. These institutions are termed rationalization, which is how we will refer to them in this Essay. The potential for open-access exists for many natural resources. Here, we examine attempted rationalization of fisheries and U.S. hydrocarbon deposits in the presence of informal property rights to streams of rents under open-access resource use.Rationalization can create large gains by internalizing externalities in use decisions and instituting extraction levels consistent with maximizing long-term rents from the resource stock. The existence of net surplus from mitigating aggregate open-access losses suggests beneficiaries of rationalization ought to be willing and able to pay opposing parties for their consent whenever rationalizing creates a surplus. In such settings, willingness to pay for transfers exceeds the willingness to accept transfers, and institutional responses to address open-access dissipation should be observed. Empirically, the process is far more complex, with certain parties systematically holding out.The existence of heterogeneity, both in users' costs and in the resource itself, has important implications for the emergence of informal institutions to protect inframarginal rents. Informal institutions are locally devised and may not be recognized in formal statutes, regulatory actions, or court rulings. These institutions emerge due to low-cost users' ability to discover and invest in more productive resource deposits and those users' desire to protect their claims. In settings where individuals interact with the resource in particular locations with differential information about the overall stock and invest in protecting their rent-generating skills, rationalization imposed by governments at the behest of less-productive users may strand investments in the resource made by more productive agents, their claims to it, and any associated human capital. In this case, rationalization effectively expropriates the informal property rights of low-cost users. Unless compensated, this expropriation is a basis for opposing otherwise socially beneficial institutional change.The view that inframarginal rents-positive economic profits earned by low-cost producers in competitive settings-exist in open-access settings has been explored in the fishery-economics literature.2 Johnson and Libecap show how differential production costs generate inframarginal rents captured by highly skilled agents that are vulnerable to redistribution or loss if uniform quotas or shares in a total allowable output are installed.3 Anderson et al. and Johnson argue that Pigouvian taxes or the auctioning of production shares transfer rents from low-cost agents.4 Despite the recognition that inframarginal rents exist in open-access resources, the economics literature has not explored the connection between sustained open-access and the establishment of endogenous, informal institutions to protect these rents.5Long-term expectations regarding the profits to be earned from resource exploitation under open-access are different for inframarginal-rent earners. If users with low expected rents view the resource stock as at risk, they may organize for new institutional arrangements implemented by the state that undermine the practices of those who have adapted to open-access, earn inframarginal rents, and view the stock's condition more favorably. …