Rapacious Resource Depletion and Excessive Investment Fuelled by Rival Factions and Insecure Property Rights

For a country fractionalized in competing factions, each owning part of the stock of naturalexhaustible resources, or with insecure property rights, we analyze how resources are transformed into productive capital to sustain consumption. We allow property rights to improve as the country transforms natural resources into capital. The ensuing power struggle about the control of resources is solved as a non-cooperative differential game. Prices of resources and depletion increase faster than suggested by the Hotelling rule, especially with many competing factions and less secure property rights. As a result, the country substitutes away from resources to capital too rapidly and invests more than predicted by the Hartwick rule. The power struggle boosts outputbut depresses aggregate consumption and welfare, especially in highly fractionalized countries with less secure property rights. Genuine saving evaluated with welfare-based accounting prices is zero in this game, but biased upwards when calculated with the lower market prices.