Trade and the Political Economy of Renewable Resource Management

Transcription

1 Trade and the Political Economy of Renewable Reource Management R. Damania ABSTRACT A growing body of literature ugget that political factor are one of the major caue of environmental damage in developing countrie endowed with a relative abundance of renewable reource. Thi ha prompted call for the ue of trade anction to encourage utainable reource management practice in thee countrie. Thi paper develop a model to ae the interaction between political lobbying, trade and the incentive to etract a renewable reource. It i demontrated that in a political equilibrium trade anction may have effect that have not been previouly identified in the literature. It i hown that if the government i predipoed to the demand of pecial interet lobby group, then trade anction may fail to induce better reource management practice. There are circumtance where anction lead to greater harveting of the renewable reource and woren environmental outcome. JEL Code: Q23, Q28, D78, F19. Keyword: Trade Sanction, Environment, Renewable Reource, Political Economy. Correpondence: Richard Damania, School of Economic, Univerity of Adelaide, Adelaide, South Autralia 5005, Autralia. richard.damania@adelaide.edu.au.

2 I Introduction Concern over the management of renewable reource have intenified in recent year. Perhap the mot widely publicized eample i the lo of tropical rainforet, which have been the focu of international negotiation ince the Rio Earth Summit in Similar problem have emerged in other contet too, uch a the over-eploitation of fih tock and wildlife 1. Recent propoal to lower tariff on renewable reource ha focued attention, yet again, on the link between trade and renewable reource degradation. 2 Environmental group fear, among other thing, that trade in carce natural reource ha political repercuion that are often ignored by economit. Specifically, it i argued that trade in carce renewable reource reward and condone the unutainable harveting policie in regime which are often unrepreentative and undemocratic. 3 On the other hand, free trader argue that trade in carce reource confer a value upon thee commoditie and thu create incentive for better management (ee, e.g., Anderon and Blackhurt (1992)). The growing empirical literature on the impact of trade on deforetation i ambiguou and ha not reolved the debate at thi tage. 4 Theoretical prediction are alo ambiguou, in a econd bet equilibrium, trade may lower welfare. 5 A recent and growing body of literature ugget that political factor are one of the major caue of environmental damage in countrie endowed with a relative 1 Common eample of wild animal threatened with etinction through over-harveting include elephant (who are harveted for ivory), rhinocero (who are ought for their horn) and tiger (whoe bone and organ are demanded for their preumed therapeutic propertie) (TRAFFIC Network Report (1997, 1998)). 2 For eample, chapter 44, 47,48, 49 of the Harmonized Tariff Schedule propoe the eventual elimination of tariff on foret product. 3 The Economit, October 9, See, e.g., Palo et al (1987), Burge (1993), Barbier et al (1994). 5 We urvey the theoretical literature in the following ection. 2

3 abundance of renewable reource. For intance, in a urvey of environmental policie in ten developing countrie Deai (1998) aert that: ".political elite ue their power to.. eploite their countrie' vat natural reource in partnerhip with dometic and international buine, with no regard to environmental degradation." (p 15) Thi concluion i reinforced in numerou other cae tudie. According to Broad (1998), timber harveting licene in the Philippine were granted to large firm with cloe link to military and government official. Moreover, the fund generated from timber conceion have been ued to finance electoral campaign. Similar problem are identified in Indoneia, where logging conceion have been awarded to a mall group of conglomerate with cloe link to the ruling political party (Hafner (1998)). Other eample include logging in the tropical hardwood foret of Cambodia, Thailand, India and Malayia with conceion being granted to politically well connected firm. 6 What thee and other urvey reveal i that declining tock of natural foret have done little to low the pace of harveting (Stringer (1994)). Moreover, lobbying and political influence are critical in determining who obtain a timber licene and how much timber i etracted. The eiting literature ha failed to eamine the interaction between political factor and the incentive to etract renewable reource. Thi paper repreent a firt tep in thi direction. We take eplicit account of environmentalit' concern about the political influence that indutry lobby group wield. We then invetigate whether trade trengthen or weaken the influence of lobby group on the reource management deciion of a elf intereted government. 6 Rainforet New Spring,

4 Thi paper develop a political economy model of renewable reource harveting drawing on Groman and Helpman' (1994) common agency analyi. We etend the tatic verion of the model developed by Fredrikon (1997, 1999), to the cae of a renewable reource. Accordingly, it i aumed that a elf-intereted government care not only about aggregate welfare, but alo political contribution received from lobby group. Political donation influence the government deciion becaue of their many ue uch a conolidating power, funding election campaign and deterring rival. The weight given to political donation in the government' objective function may be interpreted a a meaure of corruption. It i aumed that the incumbent government determine the quantity of a renewable reource that i to be harveted by iuing a licene which define the maimum allowable harvet. An indutry group lobbie the government for greater acce to the reource by offering political contribution. The government chooe the harvet to maimize it own welfare. Since the analyi focue upon the effect of lobbying by reource etractor, the role of an oppoing environmental lobby group i uppreed. A noted by Deai (op cit) thi eem reaonable for developing countrie where environmental movement are often centered in poor rural communitie, which have little influence on policy deciion. 7 7 Alternatively, the neglect of an environmental lobby group may be jutified by auming that the damage from harveting i o widely dipered that it doe not induce the affected individual to form a lobby group. In the parlance of Baron (1994) thi repreent a particularit policy, where the benefit of harveting are concentrated, but the environmental cot are o thinly pread that they do not provide ufficient incentive for individual to organize a lobby group, or make political donation. More generally, thi aumption would hold if the eternal cot of harveting are non-pecuniary and thinly pread over thoe who either lack fund or are credit contrained (e.g. the poor), while the benefit of harveting are pecuniary and concentrated. It i of further interet to note that in developed countrie too environmental lobby group eldom contribute fund directly to either government or political partie. In a number of countrie uch a the USA, Autralia, New Zealand and the UK environmental group have received (modet) fund from the government (Reynold (1998)). 4

5 Within thi framework we analyze the impact of trade anction, on reource tock under two tark cenario. Firt, we conider the cae where property right are well defined and entry into the indutry i retricted o that the firm ha an incentive to maimie long term profit, taking account of the impact of current harvet on it future payoff. In the econd cae, it i aumed that future property right are not adequately defined, o that the firm myopically maimize hort term profit. We compare the impact of trade anction in thee two regime to determine the role of property right in the political equilibrium. It i demontrated that under both property right regime, trade anction may lead to lower tock of the renewable reource in equilibrium. Intuitively, thi reflect the fact that in a political equilibrium, the contribution of the lobby group mirror the profit that are obtained from a given harvet. When anction are impoed, the profit from harveting decline and political contribution fall. A government that value political donation ufficiently will adopt policie to mitigate the decline in profit and contribution. It doe thi by increaing the harvet rate. Thu, reource tock decline in repone to trade anction. Thee reult ugget that the effect of anction may be hard to predict ince the impact depend upon the parameter of the problem and intitutional arrangement. Caution may therefore need to be eercied in uing trade intervention a a reource management tool. The analyi i baed on the following equence of event. In the political equilibrium, the firm chooe it political contribution and the government et the quota which define the maimum allowable harvet. Given knowledge of thee parameter the firm then decide it harvet. The model i olved by backward induction. 5

6 The remainder of thi paper i orga nied a follow. Section II briefly review the rapidly growing literature on trade and the environment, while Section III outline the main tructure of the model. Section IV and V derive the equilibria under long and hort run profit maimization by the firm. Section VI provide a imple numerical eample of the equilibrium, while Section VII conclude the paper. II Related Literature There i a ubtantial body of literature that eamine the interaction between trade and the environment. Thee tudie can be divided into three broad categorie. Firt, there are model which eamine the proce of trade and the political economy of environmental policy formation, in the preence of a tatic eternality. In contrat, a ditinct body of work invetigate the effect of trade on tock of a renewable reource. Finally, model of international trade have been ued to ae the welfare conequence of trade with either an open acce reource, or an eternality. In thi Section we urvey a ubet of model from each of thee categorie. The literature on the interaction between trade and the political economy of environmental policy formation while relatively modet in ize, eamine a variety of iue. For eample, in an etenion of the Groman-Helpman common agency model, Fredrikon (1999) find that trade liberalization reduce the incentive to lobby for environmental policie if a country ha a comparative diadvantage in the polluting good. In the political competition framework, Hillman and Urprung how that trade policie vary with the type of eternality and the degree to which environmentalit' concern relate to global iue. In contrat, Liedy and Hoeckman (1994) tudy the effect of different environmental intrument on trade policy and find that polluter prefer inefficient intrument ince thee increae the level of trade protection. 6

7 A ditinct literature eamine the impact of trade policie on the incentive to utainably harvet renewable reource uch a foret, fiherie and wildlife. Two oppoing view have emerged in the literature. The conventional view, which i implicit in the CITES ban on trade in endangered pecie, hold that trade anction make harveting le profitable and thu protect reource tock (Daly and Cobb (1989)). Thi ha been challenged in numerou other tudie which ugget that the higher price which reult from trade may provide the incentive neceary to profitably invet in the reource (Swanon (1990)). Thee argument have been eamined in detail by Schulz (1996) who find that anction have the deired effect of raiing reource tock when the analyi i retricted to one pecie. However, when the model are etended to include pecie interaction, trade anction may have ambiguou effect on reource tock. Barbier and Schulz (1997) tudy the effect of trade on wildlife tock in a model which take account of the opportunity cot of land allocated to conervation. Again trade retriction are found to have ambiguou effect on wildlife tock. Reource and environmental policy iue have alo been eamined from the perpective of trade theory. Chichlniky (1994) conider the conequence of trade between a country with incomplete property right (i.e. the South) and one with complete property right (i.e. the North). It i hown that trade may be Pareto inefficient and thu woren welfare. Brander and Taylor (1997) invetigate the effect of trade in a mall economy with an open acce renewable reource. They demontrate that trade may lower teady tate utility in the reource eporting country. Brander and Taylor (1998) etend the analyi to the cae of trade between two countrie with different property right regime. The reult reveal that when reource tock are at critically low level in one country, free trade hift production 7

8 to the country with the larger tock of the reource. Thu, trade may be welfare improving. The contribution of thi paper differ from previou work in everal ignificant way. Mot obviouly, we deal with the influence of a lobby group on policy deciion in a renewable reource contet. Thi contrat with the eiting environmental policy formation literature which ha focued on tatic eternalitie. The paper alo etend the renewable reource literature by eamining the impact of a lobby group on policy outcome. Rent eeking iue appear to have been largely ignored in mot tudie of renewable reource management. We attempt to partially fill thi gap in the literature. III The Model The aim of thi paper i to eamine whether trade trengthen or weaken the influence of lobby group on the harveting deciion of a elf intereted government. We therefore conider a ituation where the government i reponible for management of a reource and determine the harvet by iuing quota. The quota define the maimum allowable harvet in any period. The harveter eek to influence the government' deciion by offering political contribution to the government. Let denote the tock of the renewable reource at a given point in time. The biological growth of the reource F(), i a function of the eiting tock. It i aumed that F < 0. 8 Change in the tock depend on the biological growth rate (F()) and the harvet rate (h): d & = = F() h (1) dt 8 Subcript denote partial derivative. 8

9 It i well known that under condition of open acce there i a trong incentive for firm to over-harvet a renewable reource. The caue and olution to thi problem have been etenively tudied in the literature. However, le attention ha been paid to the role of lobby group on reource management iue. To iolate the effect of lobbying on policy deciion, thi paper abtract from open acce problem. Intead it i aumed that a ingle firm i granted a licene to harvet the reource. 9 We begin by conidering the conequence of lobbying when the firm' property right are adequately defined, in the ene that the firm ha an incentive to maimie long run profit. The net preent value of the firm' profit are defined a: δ t δ t e Π dt = e (b(p,)h S)dt t= 0 t= 0 (2a) where: δ i the given dicount rate, p i the given world price of the reource, h i the harvet, b(p, ) i the per unit profit from harveting which depend on the price (p) and available tock of the reource (). S define the political contribution of the firm in each period. In keeping with the eiting literature it i uppoed that b p > 0, b > 0, b 0 (ee, e.g. Schulze (1996)). Finally, for implicity it i uppoed that the entire harvet i eported overea at a given world price (p). Thi aumption allow u to focu on the interaction between trade policy and reource management. Profit in equation (2a) are maimied ubject to two contraint 10. The firt i equation (1), which decribe the growth of the reource. In addition, ince the government determine the maimum allowable harvet, the harvet rate in any period cannot eceed the allowable quota (h k ). Thu the econd contraint i given by: 9 A noted in later ection the analyi etend to the cae of n > 1 firm. 10 In the current contet maimiing the net preent value of profit would be rational if the firm know that it political contribution influence allocation deciion and hence current and future harvet rate. 9

10 h h k (2b) In what follow, we aume that the contraint in (2b) alway bind o that the actual harvet rate depend on the government' allocation deciion. 11 For any given harvet rate determined by the government (h k ), the firm will chooe it lobbying contribution (S) to maimie the net preent value of profit, ubject to the contraint in equation (1) and (2b). In the Appendi it i demontrated that long run equilibrium lobbying contribution atify the neceary condition: b(p,) - δ bh h F = S (3) In what follow attention i focued only on long run teady tate equilibria. Thu, F() = h mut be atified for the long run equilibrium tock. Note that b(p,) - bh δ F i the uual net bio-economic return from harveting. Equation (3) reveal that profit maimiing contribution are defined by the condition that the marginal cot of lobbying for a greater harvet (i.e. S h ), equal the net marginal benefit of the harvet. Reource harveting often generate eternalitie. In keeping with the eiting literature it i aumed that there are non-conumptive value aociated with the reource. For foret, thee may include waterhed protection, alinity prevention, oil conervation, wildlife habitat and tourim. Thee are defined by D(). Nonconumptive value are increaing in reource tock at a non-increaing rate: D > 0,D 0. The Welfare Maimiing Benchmark: 11 If thi were not the cae, then on the margin lobbying would not influence harveting. 10

11 We begin by decribing the welfare maimiing equilibrium, which i ued a a benchmark for comparion with the lobbying equilibrium. In the abence of lobbying, the government will chooe a harvet rate to maimize the net preent value of ocial welfare. Welfare in any period i given by the um of utility of all agent in the model 12 : W(h) = b(p,)h + D() (4a) The welfare maimiing harvet rate i determined by the olution to: δt Ma e W(h)dt h t= 0 (4b) ubject to: & = F() h In a teady tate, the long run equilibrium harvet atifie: 13 where F() = h mut hold in the long run equilibrium. D + bh b(p,) = 0 (5) δ F In the welfare maimiing equilibrium, the marginal bioeconomic return to the firm i equated to the marginal utility lo from reource depletion. IV The Political Equilibrium Having decribed the welfare maimiing outcome, we now turn to the political equilibrium. The government i aumed to be elf intereted and derive utility from lobby group contribution and ocial welfare. Following Groman and Helpman (1994), the government objective function i given by a weighted um of the political contribution it receive and aggregate ocial welfare. The dicounted utility accruing to the government i defined by: 12 Welfare i thu defined by profit plu non-conumptive benefit. Clearly, political contribution, when poitive, cancel out, ince contribution paid by the firm are received by the government. 13 See the Appendi for detail. 11

12 G(h) = t e δ (S + αw(h))dt (6a) t= 0 where α 0 i the weight given to aggregate ocial welfare (W(h)), relative to political contribution (S). Note that α repreent the government willingne to et policie that deviate from the welfare maimizing level in return for contribution, and therefore may be interpreted a a meaure of the level of corruption. The level of corruption i thu reflected by the government willingne to allow the lobby group to influence the reource etraction policy. Thi view of corruption i conitent with that of Bardhan (1997), who define corruption a the ue of public office for private gain (p. 1321), and to Shleifer and Vihny (1993, p. 599) who argue that corruption i the ale by government official of government property for peronal gain. Given the profit maimiing contribution a defined in equation (3), the government chooe the harvet rate to maimie it dicounted utility (i.e. equation 6a), ubject to the reource growth contraint in equation (1). In the Appendi it i hown that the harvet which maimie the government' payoff atifie: bh δ F (b )(1 + α) = 0 αd δ F (6b) A noted earlier, attention i focued on long run teady tate equilibria where h = F(). It i intructive to briefly compare the welfare maimizing harvet, with that under lobbying. Oberve that in (6b) term which relate to the lobbyit' payoff receive a weight of (1 + α) in equilibrium, while all other term are given a weight of α. The government therefore behave a if it were maimizing a welfare function which give the lobbyit' utility a weight of (1 + α) and that of all other agent a 12

13 weight of α. Hence, the political equilibrium policy i ditorted in favor of the lobby group' preference. Alternatively, thi may be een by noting that a α 0, equation (6b) converge to the neceary condition under profit maimiing: bh b = 0 δ F. Thi ugget that when ocial welfare conideration are completely ignored, the lobbyit' preferred olution eventuate. 14 For future reference we now outline an important property of the political equilibrium. Recall that the government elect the harvet rate, while the firm chooe contribution. Thu, an equilibrium for thi game i a contribution and a harvet for each period, uch that: (i) the contribution i feaible 15 ; (ii) the harvet policy h L maimize the government welfare, G(h L ), taking the contribution a given (Groman and Helpman (1994)). From Lemma 2 of Bernheim and Whinton (1986) the following neceary condition yield an equilibrium of the political game: (SI) h L Maimie G(h); ubject to & = F() h (SII) h L δt Maimie J e Π(h)dt + G(h) t= 0 ; ubject to & = F() h Condition (SI) aert that the equilibrium harvet h L mut maimize the government payoff, given the contribution offered. Condition (SII) require that h L mut alo maimize the joint payoff of the firm and the government. If thi condition i not atified, the firm will have an incentive to alter it trategy to induce the government to change the harvet rate, and capture more of the urplu. In the Appendi we how that maimizing (SI) and (SII), and performing the appropriate 14 Converely, when α the olution in equation (6b) approache that of the welfare maimiing equilibrium in (4c). 15 In thi contet thi i taken to imply that the contribution mut be non-negative. That i the lobby group cannot "ta" the government. 13

14 ubtitution, yield the political equilibrium contribution chedule of the lobby group, which atifie: b(p,) - δ bh h F = S (7) Equation (7) reveal that in equilibrium, the change in the firm political contribution (i.e. S h ), equal the effect of the harvet on it payoff (i.e. b(p,) - bh δ F ). Thu, a noted by Groman and Helpman (1994), the political contribution are locally truthful. 16 Oberve that the contribution required to atify the political equilibrium of the game (equation (7)), are eactly equal to the individually rational contribution of the firm a defined in equation (3). Thi equivalence implie that the individually rational (Nah) contribution that maimie a firm' profit (i.e. (3)), are equal to the contribution neceary for an equilibrium of the political game (i.e. (7)). More ignificantly, it can be demontrated that thi reult generalize to the cae of a lobby group with n > 1 firm. That i, if each firm take the contribution level of it rival a given, it Nah contribution will atify condition (7). Thi ugget that the political equilibrium doe not require contribution from firm in a lobby group beyond the individually rational level. Thu, lobbying i not contrained by freeriding in thi model A in Bernheim and Whinton (1986), thi can be etended to global truthfulne where contribution accurately repreent the preference of the lobbyit for all feaible h. 17 Free-riding doe not prevent lobbying in the model becaue the political equilibrium i utained by the profit maimiing contribution of each firm. Thi iue appear to have been overlooked in the literature and it ha generally been aumed that lobbying can be undermined by free-riding in thi model. Moreover, the political equilibrium i identical whether the lobbyit are aumed to be "group" repreenting an entire indutry or imply the firm acting individually. Intuitively, thi follow directly from the local truthfulne condition. Since the focu of thi paper i on reource policy iue rather than free-riding in lobby group, thee important iue are ignored for brevity. 14

15 Trade anction have often been propoed a a tool to reduce harveting and encourage utainable reource management practice. The rationale for uch anction i that they lower profit and thu diminih the incentive to deplete reource (ee, e.g., Daly and Cobb (1989)). We now determine the effect of trade anction on the government' harveting policy in the political equilibrium. Following Barbier and Schulze (1997) and Schulze (1996), it i aumed that anction lower the price received by the producer of the reource. Propoition 1: If the government place ufficient weight on political contribution, then trade anction can lower the equilibrium tock of the natural reource. (i.e. A neceary condition for d/dp > 0 i that F > 0 and F i declining in α (i.e. F α < 0).) Proof: See Appendi Intuitively thi reult may be eplained a follow. Recall that α i the weight given to ocial welfare in the government' objective function. When α i low, political contribution are (relatively) highly valued by the government. If trade anction lower price, ceteri paribu, profit will decline. From equation (7) we know that political contribution are locally truthful and mirror the profitability of any harvet policy. Thu a profit decline, by local truthfulne, political contribution fall. A government that place a high value on political donation will eek to mitigate the decline in profit and contribution. It doe thi by increaing the allowable harvet and lowering tock of the reource. Thi reult ha important policy conequence. It ugget that anction impoed on highly corrupt regime, which place a low weight on ocial welfare conideration, may woren environmental outcome. Thi occur becaue a given 15

16 harvet yield a maller benefit (i.e. contribution) to the government. If contribution vary with reource acce, a corrupt government repond to anction by increaing the harvet rate in order to retore it contribution. While thi concluion may eem obviou, it doe not appear to have been identified in the literature. The following Section invetigate whether thi reult hold when the lobbyit i given acce to the reource for a ingle period. V Myopic Firm Behavior The reult in the previou Section are baed on the aumption that the firm ha ecure future acce to the reource and therefore ha an incentive to maimie long run profit. It i clearly important to determine the enitivity of the reult to thi aumption. Accordingly thi Section conider the oppoite etreme, where the firm i granted a licene to harvet for one period. The firm maimie one period profit, which are given by: Π (h ) = b (p, ) -S (8) where upercript denote term in the hort run profit maimizing equilibrium. Profit are maimied ubject to the contraint that the harvet cannot eceed the politically determined quota (h ): h h. 18 A in the previou Section it i uppoed that thi contraint bind, o that the firm ha an incentive to lobby for greater acce to the reource. It can be verified that the profit maimizing lobbying contribution atify: b = S h (9) 18 Since acce to the reource i only granted for one period, the firm ha no incentive to take account of the impact of it current harvet on future tock of the reource. 16

17 Equation (9) i the hort run profit maimizing counterpart of equation (3). It reveal that in equilibrium the marginal benefit from lobbying for a greater harvet (b ) are equated to the marginal cot of lobbying (S ). h The government' objective function i 19 : G (h) = S + αw(h) (10) where W (h) = δ t Π + t= 0 e D( )dt The government chooe the harvet rate to maimie it payoff (i.e. equation 10) ubject to the reource growth contraint in equation (1). In the Appendi it i hown that the harvet rate in the political equilibrium atifie: αˆb h + αd ˆb(1 + α) = 0 δ F (11) where: ˆb = b δ, ˆb = b δ Propoition 2 conider the impact of trade anction on equilibrium reource tock. Propoition 2: If the government place ufficient weight on political contribution, then trade anction can lower equilibrium tock of the natural reource. (i.e. A neceary condition for d /dp >0 i that F > 0 and F i declining in α (i.e. F α < 0).)) Proof: See Appendi Propoition 2 again reveal that trade anction lower reource tock if the government place a ufficiently high value on political contribution. Thi occur 19 Since by aumption a licene to harvet i granted for one period, the firm pay political contribution only in the firt period. Moreover, for implicity and conformity with the previou Section it i aumed that the eternal damage continue in to the future. 17

18 becaue anction lower the profit from a given harvet, o that political contribution decline. A government which value political donation ufficiently, repond by increaing the harvet rate in order to mitigate the decline in contribution. Overall thee reult ugget that the more reponive i the government to the demand of harveter, the greater i the likelihood that anction may woren environmental outcome. VI. A Numerical Eample Thee prediction ugget that the qualitative impact of anction are unaffected by the property right regime in the political equilibrium. However, there remain the poibility that the quantitative effect may differ ubtantially. To ae the potential quantitative difference of price change on equilibrium tock, thi ection preent a numerical eample baed on imple functional form. It i aumed that reource growth i logitical: F() = r(k ) (12a) K where, r i the intrinic growth rate and K i the carrying capacity. For implicity harveting cot are aumed to be linear and are given by: c(h) = ch (12b) and the welfare cot from reource depletion i defined by: D() = ln() (12c) Equilibrium condition (6b) and (4b) define the equilibrium tock of the reource. Thee epreion are olved numerically for the parameter value outlined in Table 1. Table 1 about here Somewhat urpriingly, Table 1 reveal that equilibrium tock are lower in the long run equilibrium. Thi may be undertood by noting that in the long run 18

19 equilibrium the firm ha a tronger incentive to lobby for greater acce to the reource, hence equilibrium tock are lower. Similarly, the decline in reource tock i more rapid in the long run cae. Thi again reflect the greater intenity of lobbying in the long run equilibrium. Finally, change in α (the weight given to welfare) have a proportionately greater impact on tock when price are low. Intuitively, lobbying i mot intene when price are low. If the government i more reponive to lobby group demand (i.e. ha a low α) thi tranlate into lower reource tock. VII Concluion and Implication Thi paper ha eamined how trade and lobbying influence the reource management policie of a elf intereted government. Two etreme property right regime were conidered. In the firt, the harveter wa aumed to maimie long term profit. In the econd cae, it wa uppoed that the firm myopically maimize hort term profit. It wa hown that in both regime, anction lead to lower tock of the renewable reource in equilibrium if the government value political donation ufficiently. Thi occur becaue anction lower the profit obtained from a given harvet. The reource therefore yield a maller benefit (i.e. contribution) to the government. A government that value political donation ufficiently will adopt policie to mitigate the decline in profit and contribution. It doe thi by increaing the harvet rate. Thu, reource tock decline in repone to anction. In thee circumtance, if trade intervention are to be ued to promote utainable reource management practice, detailed information would be required about the parameter of the model. The reult therefore ugget the need for caution in uing trade anction a a reource management tool. 19

20 It i worth noting that thi paper ha ignored a number of important iue. Perhap the mot ignificant i the open acce problem which ha been neglected for two reaon. Firt a noted earlier, open acce iue have been etenively analyzed in the literature and are ignored in thi paper in order to focu on the effect of lobbying by harveter. More importantly, we abtract from open acce problem becaue lobbying and other rent eeking activitie cannot be utained under condition of complete free entry. To ee why, oberve that if an incumbent firm in an open acce regime uccefully lobbie for greater acce to a reource, thi will attract new entrant into the indutry. New entry will erode the higher profit obtained through lobbying. Thu, a rational incumbent will have little incentive to lobby, ince thi would allow potential entrant to free ride on it lobbying effort. Thi ugget that lobbying i individually rational only when entry into the indutry i at leat partly retricted. The aumption of retricted entry i arguably a reaonable tylized decription of the commercial (i.e. non- ubitence) foretry ector in a number of Aian countrie uch a Malayia, India and Indoneia where logging conceion have been awarded to a few etablihed player. The relevance to other reource iue uch a poaching of wildlife, where open acce problem are more pervaive, i quetionable. 20 Finally, it i important to note that the analyi i retricted to the long run teady tate propertie of the political equilibrium. In a dynamic framework, current action will depend upon the hitory of the game. In order to render the analyi tractable, thi paper ha focued upon teady tate equilibria where the hitory of the game i tationary. 21 It may be ueful in future reearch to eplore a political 20 However, The Economit, Augut 25, 2000 provide a counter eample of politician in India pandering to the demand of an elephant poacher. 21 Alternatively, if a dynamic programming framework were adopted a tationary hitory could be repreented by analyzing the Markov perfect equilibria. 20

21 economy equilibrium in which current deciion depend upon a time varying hitory of the game. Thi would involve a major etenion of the common agency model which may not be amenable to an analytical olution. However, thi i a problem which warrant further invetigation. 21

22 APPENDIX Derivation of Equation (3): Given a harvet rate (h), the current-value Hamiltonian of the problem i: H = b(p,)h S + µ (F() h) (A1) where µ i the cotate variable Auming an interior olution the firt-order condition for the control problem are: dh (b(p,) )h S 1 0 ds = µ = (A2) &µ = δµ bh µ F (A3) dh F() h dµ = & = (A4) Following Groman and Helpman (1994), it i aumed that h > In a long run equilibrium & = µ & = 0, uing thi condition performing the appropriate ubtitution and rearranging yield: bh b(p,) - h F = S (A5) δ Derivation of Equation (4c): The current-value Hamiltonian of the welfare maimiing problem i: H = b(p,)h + D() +µ(f() - h) (A6) Auming an interior olution the firt-order condition for the control problem are: dh = b(p,) µ = 0 (A7) dh &µ = δµ (bh+ D + µ F) (A8) dh F() h dµ = & = (A9) In a long run equilibrium & = µ & = 0, thu: b(p,) - D + bh = 0 δ F (A10) Derivation of Equation (6b): A noted in the tet, it i aumed that h= hk. For notational brevity the upercript (k) i ignored hereafter. The current-value Hamiltonian of the government' utility maimiing problem i: H = S + αw+µ(f() - h) (A11) Auming an interior olution the firt-order condition are: dh S h dh = + α b 0 (A12) &µ = δµ ( αb h+ α D + µ F) (A13) dh F() h dµ = = (A14) In a long run equilibrium & = µ & = 0, moreover, condition (A5) mut alo hold, thu: 22 Since h > 0, for all feaible h and S, thi implie that the invere of h eit, o that S h = 1/h. Thi condition i ued in (A5). 22

23 bh δ F (b )(1 + α) = 0 αd δ F (A15) Derivation of Equation (7): The proof proceed in three tage. Firt we prove that d/dp > 0 only if F >0. Then it i hown that F > 0 mut hold in the lobbying equilibrium. Finally we demontrate that F i declining in α. After rearrangement, the current-value Hamiltonian of the problem in (SII) i: H = (1+α)b(p,)h + α D n ()) +µ(f() - h) (A16) The neceary condition for a long run equilibrium include: dh S h dh = + α b 0 (A17) &µ = δµ (bh(1 + α) + α D + µ F) = 0 (A18) In addition, in equilibrium condition SI mut alo be atified which implie that (A12)- (A14) mut hold. Combining and rearranging yield: bh b(p,) - h δ F = S (A19) Proof of Propoition 1: The equilibrium condition i given by: Z = b(1 + α)( δ F) (1 + α)bf α D = 0 (A20) Implicitly differentiating: d Zp = dp Z (A21) where: hold if p p Z =δ b(1 +α)( δ F) > 0 (the ign follow from the fact that (A20) can only ( δ F) > 0 and by aumption b p > 0.) Z = b(1 +α)( δ F) b(1 +α)f (1 +α )(bf + bf) αd Thu by (A21) d dp > 0 if Z < 0. Note that by aumption b > 0, F < 0, b < 0 D < 0. Hence, a neceary condition for d dp > 0 i F > 0. We now how that F > 0 in the lobbying equilibrium. Let <, then ince D < 0 it follow that: D > D. (A22) Hence condition (A22) can only hold if: b(1 + α)( δ F) α bf > b(1 + α)( δ F) α bf (A23) Since by aumption b > 0, b < 0 then: b < b,b > b and ince F < 0 then F > F. It follow that thi inequality in (A23) can only hold if: F < F Now, ince <, thi implie that F > 0. Finally, we prove that F i declining in α. Upon differentiating F with repect to α: 23

24 2 F = F. α α 2 F By aumption F < 0, thu F α < 0 iff α α >0. To ign conider the welfare function. Recall from the tet that a the weight α given to welfare, α, increae, the harvet approache the welfare maimiing rate and welfare approache it maimal level. Thu, W = (bf+ bf + D) > 0 α (0, ) (A24) α α By aumption b > 0,F> 0,b> 0,D > 0 and it ha been hown that F > 0. Hence (bf+ bf + D) > 0. Thu, (A24) can only hold if > 0. It follow that α 2 F F α < 0. α Derivation of Equation (11): Let ŝ= δ S, then ŝ i a perpetual flow with preent value of S. Similarly define the perpetual flow Π= ˆ δπ with preent value of Π. With thee definition for conformity, the problem can be analyzed in an analogou manner to that in the previou Section. The current-value Hamiltonian of the government' utility maimiing problem i: H = ŝ + α( ˆΠ + D ( )) +µ(f ( ) - h ) (A25) Auming an interior olution the firt-order condition are: dh ŝ ˆ h h 0 dh = + α Π µ = (A26) &µ = δµ ( αbˆ h + α D)F) µ (A27) dh F( ) h dµ = & = (A28) In a long run equilibrium & = µ & = 0. Moreover, equation (9) which define the profit maimiing contribution mut alo hold, which require that h =Π h=b, thu: αˆbf + αd ˆb(1 + α) = 0 (A29) δ F Proof of Propoition 2 The equilibrium condition i given by: Z = b(1 ˆ + α)( δ F) ˆ αbf α D = 0 (A30) Implicitly differentiating: d Zp = dp Z (A31) 24

25 where: hold if Z =δ b(1 +α)( δ F) > 0 (the ign follow from the fact that (A30) can only p p ( δ F) > 0 and by aumption b p> 0.) Z =δ b (1 +α)( δ F) δ b(1 +α)f αδ (b F + b F) α D (A32) Oberve that d dp > 0 if Z < 0. Moreover ince by aumption b > 0, F < 0, b < d 0 D < 0, then a neceary condition for dp > 0 i F > 0. We now how that F > 0 in the lobbying equilibrium. Let <, then ince D < 0 it follow that: D > D. Hence condition (A24) can only hold if: b(1 + α)( δ F) α bf > b(1 + α)( δ F) α bf (A33) Since by aumption b > 0, b < 0 then: F b < b,b > b and ince F < 0 then > F. It follow that the inequality in (A33) can only hold if: Now, ince F < F (A34) <, thi implie that F > 0. Upon differentiating F with repect to α: 2 F F α = F. α α 2 By aumption F < 0, thu F α < 0 iff α >0. To ign conider the welfare function. It wa noted earlier that a the weight α given to welfare α increae, the harvet approache the welfare maimiing rate and welfare approache it maimal level. Thu, W = (bf δ + bf + D) α α > 0 (A35) By aumption b > 0,F > 0,b > 0,D > 0 and it ha been hown that F > 0. Hence 2 (A35) can only hold if α > 0. Hence F F α < 0. α 25

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28 TABLE 1 Numerical Reult Long Run Short Run p (a=10) (a =1) (a =10) (a =1) Parameter value: r = 1, θ = 10, c = 5, δ =