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Discussion PaperNo. 0114
Adelaide UniversitySA 5005, AUSTRALIA
Lobbying, Trade and Renewable ResourceHarvesting
Richard Damania and E. Barbier
April 2001
CENTRE FOR INTERNATIONAL ECONOMIC STUDIES
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ISSN 1445-3746 series, electronic publication
CIES DISCUSSION PAPER 0114
Lobbying, Trade and Renewable Resource Harvesting
Richard Damania and E. Barbier
Adelaide UniversitySchool of Economics and CIES
SA 5005, [email protected]
andUniversity of Wyoming
April 2001
Copyright 2001 Richard Damania and E.Barbier________________________________________________________________________
ABSTRACT
Lobbying, Trade and Renewable Resource Harvesting
Richard Damania and E. Barbier
The over-exploitation of renewable resources has intensified international concerns over the
management of these resources. This has prompted calls for the use of international policy
interventions such as trade sanctions and contingent transfers, to encourage sustainable
resource management practices in these countries. A growing body of literature suggests
that resource harvesting in these countries is largely determined by the rent seeking
activities of special interest groups This paper develops a model to assess the interaction
between lobbying, trade and the incentives to extract a renewable resource. It is
demonstrated that in a lobbying equilibrium trade sanctions may be counterproductive and
lead to greater harvesting of the renewable resource. The paper further considers whether
aid in the form of international transfers can be used to encourage more sustainable
harvesting practices. We find that when resource stocks are sufficiently low, transfers may
also fail to reduce over-exploitation of the resource. However, it is possible to design a
transfer scheme that overcomes this problem. Thus, an appropriately designed system of
transfers is likely to be more effective in promoting sustainable harvesting practices.
JEL Codes: Q23, Q28, D78, F19.
Keywords: Trade Sanctions, Environment, Renewable Resources, Political Economy.
Keywords:
JEL codes:
Contact author(s):
Richard DamaniaAdelaide UniversitySchool of Economics and CIESSA 5005, AUSTRALIATel: +61 8 8303 4933Fax: +618 8223 [email protected]
2
I IntroductionConcerns over the management of renewable resources have intensified in
recent years. Perhaps the most widely publicized example is the loss of tropical
rainforests, which have been the focus of international negotiations since the Rio
Earth Summit in 1992. Similar problems have emerged in other contexts too, such as
the over-exploitation of fish stocks and wildlife1.
A recent and growing body of literature suggests that lobbying by special
interest groups is one of the major causes of environmental damage in countries
endowed with a relative abundance of renewable resources. For instance, in a survey
of environmental policies in ten developing countries Desai (1998) asserts that:
"….political elites use their power to.. exploit their countries' vast natural
resources in partnership with selected businesses, with no regard to
environmental degradation." (p 15)
This conclusion is reinforced in numerous other case studies. According to Broad
(1998), timber harvesting licenses in the Philippines were granted to firms with close
links to government officials. Moreover, the funds generated from timber concessions
were used to finance electoral campaigns. Similar problems are identified in
Indonesia, where logging concessions have been awarded to a small group of
conglomerates associated with the ruling political party (Hafner (1998)). Other
examples include logging in the tropical hardwood forests of Thailand, India and
Malaysia with concessions being granted to firms who engage in intensive political
lobbying.2 What these and other surveys reveal is that declining stocks of natural
1 Common examples of wild animals threatened with extinction through over-harvesting includeelephants (who are harvested for ivory), rhinoceros (who are sought for their horns) and tigers (whosebones and organs are demanded for their presumed therapeutic properties) (TRAFFIC Network Report(1997, 1998)).2 Rainforest News Spring, 1999. See also Bromley (1999) for a discussion of the role of politicalinstitutions and rent seking.
3
forests have done little to slow the pace of harvesting. Moreover, lobbying and
political influence are critical in determining who obtains a timber license and how
much timber is extracted.
Despite the prevalence of these problems, the existing literature has failed to
examine the impact of special interest lobbying on resource harvesting decisions.
This issue is of economic significance for at least two reasons. Firstly, political
factors appear to be responsible for a major reallocation of global renewable
resources. Thus, an understanding of the effects of lobbying on resource harvesting is
of considerable economic relevance. Secondly, many of these renewable resources
confer significant cross-border external benefits3. This has prompted calls for the use
of various policies, such as trade sanctions and transfers, to coerce these nations to
reduce the level of resource exploitation. It is clearly important to determine whether
such interventions strengthen or weaken the distorting influence of lobby groups on
domestic resource management decisions. This paper represents a first step in
analyzing these issues. It is shown that there are circumstances when trade
interventions may be counterproductive and lead to greater harvesting of the resource.
Similarly, when resource stocks are low conditional transfers may also be ineffective
and simply induce more intense lobbying by resource extractors. The results thus
highlight the manner in which lobbying can negate international efforts to influence
harvesting policy.
The paper extend Grossman and Helpman's (1994) common agency model of
lobbying to the case of a renewable resource4. Accordingly, it is assumed that a self-
interested government cares not only about aggregate welfare, but also the political
3 For instance, forests may provide transboundary amenities in their role as stores of carbon, geneticmaterial and the existence values associated with species who reside in these habitats.4 This model has been previously applied to study static environmental externalities by Fredriksson(1997, 1999).
4
contributions that it receives from lobby groups. Political donations influence the
government’s decisions because of their many uses such as consolidating power,
funding election campaigns and deterring rivals. It is assumed that the incumbent
government determines the quantity of a renewable resource that is to be harvested by
issuing a license which defines the maximum allowable harvest. An industry group
lobbies the government for greater access to the resource by offering political
contributions. The government chooses the harvest to maximize its own welfare.
Since the analysis focuses upon the effects of lobbying by resource extractors,
the role of an opposing environmental lobby group is suppressed. As noted by Desai
(op cit) this seems reasonable for developing countries where environmental
movements are often centered in poor rural communities, which have little influence
on policy decisions. 5
We begin by analyzing the impact of trade sanctions on resource stocks. It is
demonstrated that if the government placed a high value on political contributions,
then trade sanctions may lead to lower stocks of the renewable resource in
equilibrium. Intuitively, this reflects the fact that in a lobbying equilibrium, the
contributions of the lobby group mirror the profits that are obtained from a given
harvest. When sanctions are imposed, the profits from harvesting decline and
political contributions fall. A government that values political donations sufficiently
will adopt policies to mitigate the decline in profits and contributions. It does this by
5 Alternatively, the neglect of an environmental lobby group may be justified by assuming that thedamage from harvesting is so widely dispersed that it does not induce the affected individuals to form alobby group. In the parlance of Baron (1994) this represents a particularist policy, where the benefitsof harvesting are concentrated, but the environmental costs are so thinly spread that they do not providesufficient incentive for individuals to organize a lobby group, or make political donations. Moregenerally, this assumption would hold if the external costs of harvesting are non-pecuniary and thinlyspread over those who either lack funds or are credit constrained (e.g. the poor), while the benefits ofharvesting are pecuniary and concentrated. It is of further interest to note that in developed countriestoo environmental lobby groups seldom contribute funds directly to either governments or politicalparties. In a number of countries such as the Australia, New Zealand and the UK environmental groupshave received (modest) funds from the government
5
increasing the harvest rate. Thus, resource stocks decline in response to trade
sanctions. This result suggests that it may be difficult to predict the environmental
consequences of trade sanctions, since the eventual impact depends upon the
parameters of the problem and institutional arrangements. Caution may therefore
need to be exercised in using trade interventions as a resource management tool.
We then consider whether international transfers, which are contingent upon
environmental objectives, can be used to reduce over-exploitation of the resource.
Examples of such schemes include: debt-for-nature swaps, World Bank funding for
projects to counter deforestation (e.g. the Global Environmental Fund) and aid which
is conditional upon certain environmental criteria. The common feature of all these
initiatives is that the transfer is linked to certain environmental objectives. In this
paper we focus upon a simple scheme where the level of funds transferred to the
harvesting nation is conditional upon stocks of the resource.
It is shown that when resource stocks are low, transfers may fail to curb the
incentive to over-harvest the resource. Intuitively, in deciding whether to increase
resource stocks the government must trade off the benefits from the transfer against
the potential loss of political contributions. We identify the circumstances under
which the fall in political donations may outweigh the payoffs from the transfer. This
occurs when harvesting is highly profitable, so that political contributions are high
and resource stocks are low.
The paper further investigates whether it is possible to design a transfer
schedule which overcomes this problem. It is shown that if the transfer function rises
sufficiently rapidly at low resource stocks (i.e. is sufficiently concave), then transfers
will always induce the government to increase equilibrium stocks. Intuitively, a
concave transfer function strengthens the government's incentive to maintain stocks
6
when they are at low levels. However, this is precisely when the profits from
harvesting and the political contributions paid to the government are relatively high.
Hence, a sufficiently concave transfer function is required to curb the influence of the
lobbyist on policy decisions. Moreover, if there are significant cross-border
externalities associated with the resource, such transfers may be viewed as a means of
internalizing externalities and promoting more efficient resource usage.
Formally, the analysis is based on the following sequence of events. In the
political equilibrium, the firm chooses its political contribution and the government
sets the quota, which defines the maximum allowable harvest. Given knowledge of
these parameters the firm then decides its harvest. The model is solved by backward
induction.
There is a vast and burgeoning literature on the interaction between trade and
the environment. These studies can be divided into three broad categories. First,
there are models that examine the impact of trade on the political economy of
environmental policy formation in the presence of a static externality. This literature
while relatively modest in size, examines a variety of issues, such as the effects of
comparative advantage and trade protection on lobbying (e.g. Fredriksson (1999),
Liedy and Hoeckman (1994)). In contrast, a distinct body of work investigates the
consequences of trade on stocks of a renewable resource. The conventional view
holds that trade sanctions make harvesting less profitable and thus protect resource
stocks (Daly and Cobb (1989)). This conclusion been challenged in numerous recent
studies which suggest that the higher prices which result from trade may provide the
incentives necessary to profitably invest in the resource (Swanson (1990), Schulz
(1996), Barbier and Schulz (1997)). Finally, models of international trade have been
used to assess the consequences of trade with either an open access resource, or an
7
externality. The efficiency effects of trade are often found to be ambiguous, since in a
second best equilibrium trade may lower welfare (see, e.g. Chichlnisky (1994),
Brander and Taylor (1997), (1998)). The contribution of this paper differs from
previous work in several significant ways. Most obviously, we deal with the
influence of a lobby group on policy decisions in a renewable resource context.
There is also a growing literature on the role of aid which is conditional upon
environmental protection. Much of this work focuses on two key issues: the structure
and effectiveness contracts (e.g. Deacon and Murphy (1997), Soest and Lensink
(2000)) and the conditions that must be satisfied for such contracts to be self
enforcing (Chambers et al (1996)). To our knowledge none of this literature has
assessed the effectiveness of transfers when policies are influence by special interest
group lobbying.
The remainder of this paper is organised as follows. Section II outlines the
main structure of the model. Sections III and IV derive the equilibria under trade
sanctions and transfers respectively. Section V concludes the paper.
II The ModelThe main objective of this paper is to examine whether trade sanctions and
other international policy interventions strengthen or weaken the influence of lobby
groups on the harvesting decisions of a self interested government. We therefore
consider a situation where the government is responsible for management of a
resource and determines the harvest by issuing quotas. The quotas define the
maximum allowable harvest in any period. The harvester seeks to influence the
government's decisions by offering political contributions to the government.
8
Let x denote the stock of the renewable resource at a given point in time. The
biological growth of the resource F(x), is a function of the existing stock. It is
assumed that Fxx < 0.6 Changes in the stock depend on the biological growth rate
(F(x)) and the harvest rate (h):
dxx F(x) h
dt= = −& (1)
It is well known that under conditions of open access there is a strong
incentive for firms to over-harvest a renewable resource. The causes and solutions to
this problem have been extensively studied in the literature. However, less attention
has been paid to the role of lobby groups on resource management issues. To isolate
the effects of lobbying on policy decisions, this paper abstracts from open access
problems. Instead it is assumed that a single firm is granted a license to harvest the
resource.7 For simplicity it is further supposed that the firm's property rights are
adequately defined, in the sense that the firm has an incentive to maximise long run
profits.
The net present value of the firm's profits are defined as:
t t
t 0 t 0
e dt e (b(p,x)h S)dt∞ ∞
− −
= =
Π = −∫ ∫δ δ (2a)
where: δ is the given discount rate, p is the given world price of the resource, h is the
harvest, b(p, x) is the per unit profits from harvesting which depends on the price (p)
and available stocks of the resource (x). S defines the political contributions of the
firm in each period. In keeping with the existing literature it is supposed that bp > 0,
bx > 0, bxx ≤ 0, bpx = 0 (see, e.g., Schulze (1996)). Finally, for simplicity it is assumed
that the entire harvest is exported overseas at a given world price (p). This stylised
6 Subscripts denote partial derivatives.7 As noted in later sections the analysis extends to the case of n > 1 firms.
9
assumption allows us to focus on the interaction between trade policy and resource
management.
Profits in equation (2a) are maximised subject to two constraints8. The first is
equation (1), which describes the growth of the resource. In addition, since the
government determines the maximum allowable harvest, the harvest rate in any period
cannot exceed the allowable quota (hk). Thus the second constraint is given by:
h ≤ hk (2b)
In what follows, we assume that the constraint in (2b) always binds so that the actual
harvest rate depends on the government's allocation decisions.9
For any given harvest rate determined by the government (hk), the firm will
choose its lobbying contributions (S) to maximise the net present value of profits,
subject to the constraints in equations (1) and (2b). In the Appendix it is
demonstrated that lobbying contributions satisfy the necessary condition:
b(p,x) - xh
x
b hS
F=
−δ(3)
In what follows attention is focused only on long run steady state equilibria.
Thus, F(x) = h must be satisfied for the long run equilibrium stock. Note that b(p,x) -
x
x
b hF−δ
is the usual net bio-economic return from harvesting. Equation (3) reveals
that profit maximising contributions are defined by the condition that the marginal
cost of lobbying for a greater harvest (i.e. Sh), equals the net marginal benefit of the
harvest.
Resource harvesting often generates externalities. In keeping with the existing
literature it is assumed that there are non-consumptive values associated with the
8 In the current context maximising the net present value of profits would be rational if the firm knowsthat its political contributions influence allocation decisions and hence current and future harvest rates.9 If this were not the case, then on the margin lobbying would not influence harvesting.
10
resource. For forests, these may include watershed protection, salinity prevention,
soil conservation, wildlife habitat and tourism. These are defined by D(x). Non-
consumptive values are increasing in resource stocks at a non-increasing rate:
x xxD 0,D 0.> ≤
The Welfare Maximising Benchmark:
We begin by describing the welfare maximising equilibrium, which is used as
a benchmark for comparison with the lobbying equilibrium. In the absence of
lobbying, the government will choose a harvest rate to maximize the net present value
of social welfare. Welfare in any period is given by the sum of utility of all agents in
the model10:
W(h) = b(p,x)h + D(x) (4a)
The welfare maximising harvest rate is determined by the solution to:
t
ht 0
M a x e W(h)dtδ∞
−
=∫ (4b)
subject to: x F(x) h= −&
In a steady state, the long run equilibrium harvest satisfies:11
b(p,x) x x
x
D b hF
+−
−δ= 0 (5)
where F(x) = h must hold in the long run equilibrium.
As is well established, in the welfare maximising equilibrium the marginal bio-
economic return to the firm is equated to the marginal loss from resource depletion.
IV The Political Equilibrium
10 Welfare is thus defined by profits plus non-consumptive benefits. Clearly, political contributionscancel out, since contributions paid by the firm are received by the government.11 See the Appendix for details.
11
Having described the welfare maximising outcome, we now turn to the
political equilibrium. The government is assumed to be self interested and derives
utility from lobby group contributions and social welfare. Following Grossman and
Helpman (1994), the government’s objective function is given by a weighted sum of
the political contributions it receives and aggregate social welfare. The discounted
payoffs to the government are defined by:
G(h) = t
t 0
e δ∞
−
=∫ (S + αW(h))dt (6a)
where α ≥ 0 is the weight given to aggregate social welfare (W(h)), relative to
political contributions (S).
Note that α represents the government’s willingness to set policies that deviate
from the welfare maximizing level, in return for contributions. Accordingly, α may
be interpreted as a measure of the level of corruption. This is consistent with the
World Bank's (1999) definition of "… corruption as the use of public office for
private gain”.
Given the profit maximising contributions as defined in equation (3), the
government chooses the harvest rate to maximise its discounted utility (i.e. equation
6a), subject to the resource growth constraint in equation (1). In the Appendix it is
shown that the harvest which maximises the government's payoffs satisfies:
x x
x x
b h D(b )(1 ) 0
F F− + − =
− −α
αδ δ
(6b)
As noted earlier, attention is focused on long run steady state equilibria where h =
F(x).
It is instructive to briefly compare the welfare maximizing harvest, with that
under lobbying. Observe that in (6b) terms which relate to the lobbyist's payoffs
12
receive a weight of (1 + α) in equilibrium, while all other terms are given a weight of
α. The government therefore behaves as if it were maximizing a welfare function
which gives the lobbyist's utility a weight of (1 + α) and that of all other agents a
weight of α. Hence, the political equilibrium policy is distorted in favor of the lobby
group's preferences. Alternatively, this may be seen by noting that as α → 0,
equation (6b) converges to the necessary condition under profit maximising:
x
x
b hb 0
F− =
−δ. This suggests that when social welfare considerations are completely
ignored, the lobbyist's preferred solution eventuates.12 This result is summarised in
the following Proposition.
Proposition 1: Ceteris paribus, the harvest rate in the political equilibrium exceeds
that in the welfare maximising equilibrium.
Proof: See Appendix.
For future reference we now outline an important property of the political
equilibrium. Recall that the government selects the harvest rate, while the firm
chooses contributions. Thus, an equilibrium for this game is a contribution and a
harvest for each period, such that: (i) the contribution is feasible 13; (ii) the harvest
policy hL maximizes the government’s welfare, G(hL), taking the contribution as
given (Grossman and Helpman (1994)). From Lemma 2 of Bernheim and Whinston
(1986) the following necessary conditions yield an equilibrium of the political game:
(MI) hL Maximises G(h); subject to x F(x) h= −&
(MII) hL Maximises J )h(Gdt)h(e0t
t +Π∫≡∞
=
δ− ; subject to x F(x) h= −&
12 Conversely, when α → ∞ the solution in equation (6b) approaches that of the welfare maximisingequilibrium in (4c).
13
Condition (MI) asserts that the equilibrium harvest hL must maximize the
government’s payoff, given the contribution offered. Condition (MII) requires that hL
must also maximize the joint payoffs of the firm and the government. If this
condition is not satisfied, the firm will have an incentive to alter its strategy to induce
the government to change the harvest rate, and capture more of the surplus. In the
Appendix we show that maximizing (MI) and (MII) and performing the appropriate
substitutions, yields the political equilibrium contribution schedule of the lobby
group, which satisfies:
b(p,x) - xh
x
b hS
F=
−δ(7a)
Equation (7a) reveals that in equilibrium, the change in the firm’s political
contributions (i.e. Sh), equals the effect of the harvest on its payoffs (i.e. b(p,x) -
x
x
b hF−δ
). Thus, as noted by Grossman and Helpman (1994), the political contributions
are locally truthful.14
Observe that the contributions required to satisfy the political equilibrium of
the game (equation (7a)), are exactly equal to the individually rational contributions
of the firm as defined in equation (3). This equivalence implies that the individually
rational (Nash) contributions that maximise a firm's profits (i.e. (3)), are equal to the
contributions necessary for an equilibrium of the political game (i.e. (7a)). More
significantly, it can be demonstrated that this result generalizes to the case of a lobby
group with n > 1 firms. That is, if each firm takes the contribution levels of its rivals’
as given, its Nash contribution will satisfy condition (7a). This suggests that the
political equilibrium does not require contributions from firms in a lobby group
13 In this context this is taken to imply that the contribution must be non-negative. That is the lobbygroup cannot "tax" the government.
14
beyond the individually rational level. Thus, lobbying is not constrained by free-
riding in this model. 15
Finally, we note that the equilibrium level of contributions to the government
is given by the difference in social welfare when resource stocks are at their welfare
maximizing level (xw), and at the political equilibrium (xL) (Grossman and Helpman
(op cit)). Specifically, the necessary contribution to the government from the lobby
group is defined by
S = w L[W(x ) W(x )],α − (7b)
Note that w L[W(x ) W(x )]α − defines the utility loss to the government when resource
stocks deviate from the welfare maximizing level. Thus, the contributions perfectly
compensate the government for the welfare loss associated with the participation of
the industry lobby group in the policy process. The welfare loss is weighted by α in
order to adjust for its importance in the government’s objective function.
Trade sanctions have often been proposed as a tool to reduce harvesting and
encourage sustainable resource management practices. Such policies have been
justified on the grounds that they lower profits and thus diminish the incentive to
deplete resources (see, e.g., Daly and Cobb (1989)). We now determine the effect of
trade sanctions on the government's harvesting policy in the political equilibrium.
Following Barbier and Schulze (1997) and Schulze (1996), for simplicity it is
assumed that trade sanctions lower the price received by producers of the resource.
14 As in Bernheim and Whinston (1986), this can be extended to global truthfulness wherecontributions accurately represents the preferences of the lobbyist for all feasible h.15 Free-riding does not prevent lobbying in the model because the political equilibrium is sustained bythe profit maximising contributions of each firm. This issue appears to have been overlooked in theliterature and it has generally been assumed that lobbying can be undermined by free-riding in thismodel. Moreover, the political equilibrium is identical whether the lobbyists are assumed to be"groups" representing an entire industry or simply the firms acting individually. Intuitively, this followsdirectly from the local truthfulness condition . Since the focus of this paper is on resource policy issuesrather than free-riding in lobby groups, these important issues are ignored for brevity.
15
Proposition 2: If the government places sufficient weight on political contributions,
then trade sanctions may lower equilibrium stocks of the natural resource.
(i.e. A necessary condition for dx/dp > 0 is that Fx > 0 and Fx is declining in α (i.e.
Fxα < 0). Hence for sufficiently low α, dx/dp > 0)
Proof: See Appendix
Intuitively this result may be explained as follows. Recall that α is the weight
given to social welfare in the government's objective function. Thus, when α is low,
political contributions are (relatively) highly valued by the government. Since trade
sanctions lower prices then, ceteris paribus, profits will decline. We know that
political contributions are locally truthful and mirror the profitability of any harvest
policy (i.e. equation (7a)). Thus, as profits decline, by local truthfulness, political
contributions fall. A government that places a high value on political donations will
seek to mitigate the decline in contributions. It does this by increasing the lobbyist's
access to the resource. Hence resource stocks decrease.
This result has important policy consequences. It suggests that sanctions
imposed on highly corrupt regimes, which place a low weight on social welfare
considerations, may worsen environmental outcomes. This occurs because a given
harvest yields a smaller benefit (i.e. contribution) to the government. If contributions
vary with resource access, a corrupt government responds to sanctions by increasing
the harvest rate in order to restore its contributions. While this conclusion may seem
obvious, it does not appear to have been identified in the literature.
16
IV. International Transfers
Since lobbying can render trade sanctions ineffective, it is important to
determine whether international transfers could be used to induce more sustainable
harvesting practices. Examples of such initiatives include debt-for-nature swaps and
the World Bank's Global Environmental Fund (GEF)16. The distinguishing feature of
these schemes is that the transfer is conditional upon environmental improvements
being undertaken in the recipient nations. Countries are thus are rewarded rather than
coerced to optimally manage their resources. For simplicity we focus on the common
element in these schemes and consider the effects of a transfer which is increasing in
stocks of the resource.
Let R(x) be the per period transfer schedule that is offered to the harvesting
nation. It is supposed that the transfer is increasing in resource stocks. Thus, Rx > 0.
At this stage we place no restriction on the shape of the transfer function. Hence, the
sign of the second derivative, Rxx, is left unrestricted.17
Since the government is assumed to be self interested and corrupt, it is
possible that part (or all) of the transfer may be subverted by the government for
either personal or political purposes. We allow for this by assuming that (1 - θ)R(x)
of the funds are embezzled by the government for its own uses18 The remaining
θR(x) of the funds, are distributed to the population in a lump sum manner. Thus, the
government's objective function is given by:
G(h) = t
t 0
e δ∞
−
=∫ (S + (1 - θ)R(x) + α(b(p,x)h+D(x) + θR(x))dt (8a)
16 Debt-for-nature swaps usually involve a portion of national debt being converted at a discount to anenvironmental fund. On the other hand, GEF provides direct funding for environmental projects infour key categories: bio-diversity preservation, climate change, water pollution and ozone depletion.17 The timing of events is as follows. In the first stage the donor country offers the transfer function.The following stage determines the political equilibrium in which the firm chooses contributions andthe government the quota. In the final stage the firm selects its harvest rate.
17
In the Appendix it is shown that the political equilibrium harvest is defined by the
condition:
x x x
x x
b h D R(b )(1 ) 0
F F +
− + − = − −
α σα
δ δ(8b)
where: σ = (1 - θ(1 - α)).
In equilibrium the weighted marginal payoff to the lobbyist is equated to the weighted
marginal loss from resource depletion and the marginal reduction in transfers. Note
that terms which directly increase the government's payoffs (i.e. factors that determine
political contributions and the proportion of transfer funds diverted by the government
for it's own use) are given greater weight than all other terms.
We now assess the impact of a transfer on the lobbying equilibrium. We
begin by investigating the effects on the level of lobby group contributions.
Proposition 3a: Ceteris paribus, the offer of a higher transfer per unit of the resource
conserved, leads to more intense lobbying by the harvesting firm.
(i.e. Sr
∂∂
> 0)
Proposition 3a reveals that an increase in transfers results in higher contributions by
the harvesting firm. The intuition for this result is as follows. Recall from equation
(7b) that the harvest is increased beyond the welfare maximising equilibrium, only if
the lobbyist adequately compensates the government for the utility loss that it suffers.
Ceteris paribus, an increase in transfers raises the government's payoffs from
conserving resource stocks. To compensate for this, the lobby group is therefore
compelled to increase its contributions. Stated differently, higher transfers raise the
18 Clearly we assume that θ ≤ 1.
18
opportunity cost to the government of resource depletion. This in turn necessitates a
larger contribution from the resource extractor.
Having determined the impact of transfers on political contributions we now
turn to the effect on resource stocks. Proposition 3b identifies the circumstances
under which the transfer may fail to curb over-harvesting of the resource.
Proposition 3b: If initial stocks of the resource are sufficiently low, then the offer of a
higher transfer per unit of the resource conserved may fail to induce the government
to increase resource stocks.
(i.e. dx/dr< 0 if Fx > Ψ > 0)
Proof: See Appendix
The intuition for this result is as follows. The offer of a higher transfer perturbs the
initial equilibrium in a number of conflicting ways. Firstly, it raises the payoffs to the
government from conserving resource stocks (i.e. the opportunity cost of resource
depletion increases). Moreover, by Proposition 3a an increase in the transfer also
induces higher political contributions and more intense lobbying. The government
must therefore trade-off the higher benefits from conservation against those from
resource depletion. Clearly, if the payoffs from increased political contributions
exceed those from the transfer, the government will find it optimal not to raise
resource stocks. Proposition 3b reveals that this is likely to occur when harvesting is
highly profitable, so that (by local truthfulness) political contributions are relatively
high and resource stocks are low19 An implication of this result is that transfers will
19 Note that when harvesting is highly profitable, then ceteris paribus stocks tend to be relatively low.Thus, this result obtains when resource stocks are relatively low. Formally, since Fxx < 0, then arelatively large value of Fx corresponds to lower stocks. Hence, the result in Proposition 3b hold forvalues of Fx > Ψ > 0.
19
be less effective in curbing over-harvesting in corrupt regimes with well organized
lobby groups.
It is worth noting that this conclusion is broadly consistent with the empirical
results of Deacon and Murphy (1997), who find that the probability of a debt-for-
nature swap being accepted is increasing in the level of democracy in the recipient
country. Proposition 3b may provide a theoretical explanation for the Deacon and
Murphy findings, if regimes which place a greater weight on political contributions
are also less democratic.
Since transfers may be ineffective when resource stocks are low, it is
important to determine whether it is possible to design a transfer function which
overcomes this problem. 20 This issue is addressed in Proposition 3c.
Proposition 3c: If the transfer function rises sufficiently steeply at low stock levels
(i.e. is sufficiently concave in resource stocks), then higher transfers always lead to
higher equilibrium resource stocks.
(i.e. dx/dr > 0 if Rxx < Ω ≡ ( )( )x xx xx xx1
b F b b F (1 ) Dδ − − + α − ασ
)
Proof: See Appendix.
Intuitively this result may be explained as follows. Recall that a concave transfer
function rises relatively steeply at low stock levels. Hence, it strengthens the
government's incentive to maintain stocks when they are at low levels. However, this
20 The need for corrective policies might be most urgent if harvesting leads to a high utility loss whenstocks are low. This may occur if the risk of species extinction is greater at low stock levels. Notable,though little publicized examples of such situations, include logging in the Sumatran forests which arethe last remaining refuge of the Sumatran tiger (Panthera tigris sumatrae) which is listed as criticallyendangered by the IUCN, timber felling in Kaziranga Protected Area in India which is one of the fewremaining habitats of critically endangered species such as the one-horned rhino (Rhinocerosunicornus) and the Bengal tiger (Panthera tigris tigris) (Sanctuary Asia, December 2000).
20
is precisely when contributions are relatively high. Hence, a sufficiently concave
transfer function can mitigate the influence of the lobbyist and encourage more
sustainable harvesting. Moreover, if there are significant cross-border externalities
associated with the resource, such transfers may be viewed as a means of internalizing
externalities and promoting more efficient resource usage.
V Conclusions and Implications
This paper has examined how trade and lobbying influence the resource
management policies of a self interested government. It was shown that lobbying by
resource extractors will result in over-exploitation of the resource. The paper thus
considered whether trade sanctions could be used to induce more sustainable resource
harvesting policies. It was demonstrated that trade sanctions lead to lower stocks of
the renewable resource in equilibrium if the government values political donations
sufficiently. This occurs because sanctions lower the profits obtained from a given
harvest. The resource therefore yields a smaller benefit (i.e. contribution) to the
government. A government that values political donations sufficiently will adopt
policies to mitigate the decline in profits and contributions. It does this by increasing
the harvest rate. This result suggests that in corrupt regimes, which place a high value
on political contributions, trade sanctions may be counterproductive. Accordingly,
caution may need to be exercised in using trade interventions as a resource
management tool.
It was further demonstrated that transfers, if properly designed, can be used to
induce more sustainable harvesting practices. For this to occur it is necessary for the
payoffs to the government from higher transfers to exceed those from lobbying. This
requires that the transfer function rises sufficiently steeply at low stock levels, thus
21
strengthening the government's incentive to conserve stocks when contributions are
likely to be relatively high.
It is worth noting that this paper has ignored a number of important issues.
Perhaps the most significant is the open access problem which has been neglected for
two reasons. First as noted earlier, open access issues have been extensively analyzed
in the literature and are ignored in this paper in order to focus on the effects of
lobbying by harvesters. More importantly, we abstract from open access problems
because lobbying and other rent seeking activities cannot be sustained under
conditions of complete free entry. To see why, observe that if incumbents
successfully lobby for greater access to a resource, this will attract new entrants into
the industry. New entry will erode the higher profits obtained through lobbying.
Thus, a rational incumbent will have little incentive to lobby, since this would allow
potential entrants to free ride on its lobbying efforts. This suggests that lobbying is
individually rational only when entry into the industry is at least partly restricted. The
assumption of restricted entry is arguably a reasonable stylized description of the
commercial (i.e. non- subsistence) forestry sector in a number of countries such as
Malaysia, India and Indonesia where logging concessions have been awarded to a few
established players. The relevance to other resource issues such as poaching of
wildlife, where open access problems are more pervasive, is questionable.21
A further simplification in the model is the assumption that the lobbyist has
secure future access to the resource and thus maximises long run profits. It can be
shown that all the qualitative conclusions of this paper hold for the case where the
lobbyist is granted a license for only one period and thus maximises one period
21 Note also that this paper does not consider other causes of deforestation arising from rural activitiessuch as fuelwood collection, grazing and agriculture, all of which have been analysed in the literature.
22
payoffs22. The conclusions in this paper are thus robust to variations in the temporal
distribution of property rights.
Finally, it is important to note that the analysis is restricted to the long run
steady state properties of the political equilibrium. In a dynamic framework, current
actions will depend upon the history of the game. In order to render the analysis
tractable, this paper has focused upon steady state equilibria where the history of the
game is stationary. 23 It may be useful in future research to explore a political
economy equilibrium in which current decisions depend upon a time varying history
of the game. This would involve a major extension of the common agency model
which may not be amenable to an analytical solution. However, this is a problem that
warrants further investigation.
22 An appendix proving the results for one period maximisation is available upon request.23 Alternatively, if a dynamic programming framework were adopted a stationary history could berepresented by analyzing the Markov perfect equilibria.
23
APPENDIXDerivation of Equation (3):Given a harvest rate (h), the current-value Hamiltonian of the problem is:
H b(p,x)h S (F(x) h)= − + −µ (A1)where µ is the costate variableAssuming an interior solution the first-order conditions for the control problem are:
SdH
(b(p,x) )h 1 0dS
= − − =µ (A2)
x xb h F= − −&µ δµ µ (A3)dH
x F(x) hdµ
= = −& (A4)
Following Grossman and Helpman (1994), it is assumed that hs > 0.24 In a long runequilibrium x 0µ= =& & , using this condition, performing the appropriate substitutionsand rearranging yields:
b(p,x) - xh
x
b hS
F=
−δ(A5)
Derivation of Equation (5):The current-value Hamiltonian of the welfare maximising problem is:
H = b(p,x)h + D(x) +µ(F(x) - h) (A6)
Assuming an interior solution the first-order conditions for the control problem are:dH
b(p,x)dh
= − µ = 0 (A7)
x x x(b h D F )= − + +&µ δµ µ (A8)dH
x F(x) hdµ
= = −& (A9)
In a long run equilibrium x 0µ= =& & , thus:
b(p,x) - x x
x
D b hF
+−δ
= 0 (A10)
Derivation of Equation (6b):As noted in the text, it is assumed that h= hk. For notational brevity the superscript(k) is ignored hereafter. The current-value Hamiltonian of the government's utilitymaximising problem is:
H = S + αW+µ(F(x) - h) (A11)Assuming an interior solution the first-order conditions are:
hdH
S b 0dh
= + − =α µ = 0 (A12)
x x x( b h D F )= − + +&µ δµ α α µ (A13)dH
x F(x) hdµ
= = −& (A14)
In a long run equilibrium x 0µ= =& & , moreover, condition (A5) must also hold, thus:
24 Since hs > 0, for all feasible h and S, this implies that the inverse of h exists, so that Sh = 1/hs. Thiscondition is used in (A5).
24
x x
x x
b h D(b )(1 ) 0
F Fα
αδ δ
− + − =− −
(A15)
Derivation of Equation (7):After rearrangement, the current-value Hamiltonian of the problem in (MII) is:
H = (1+α)b(p,x)h + α Dn(x)) +µ(F(x) - h) (A16)The necessary conditions for a long run equilibrium include:
hdH
S b 0dh
= + − =α µ (A17)
x x x(b h(1 ) D F )= − + + +&µ δµ α α µ = 0 (A18)In addition, in equilibrium condition (MI) must also be satisfied which implies that(A12)- (A14) must hold. Combining and rearranging yields:
b(p,x) - xh
x
b hS
F=
−δ(A19)
Proof of Proposition 1:Let superscript w denotes terms in the welfare maximising equilibrium. Comparingequations (6b) and (5), note that if xw = x, then w w w w
x x x x x xF F , b b,b b ,D D= = = = . Itfollows that (5) can only hold if hw < h.25
Proof of Proposition 2:The proof proceeds in three stages. First we prove that dx/dp > 0 only if Fx >0. Thenit is shown that Fx> 0 must hold in the lobbying equilibrium. Finally, we demonstratethat Fx is declining in α. Hence for sufficiently small α, dx/dp > 0.The equilibrium condition is given by:
x x xZ b(1 )( F ) (1 )b F D 0= + − − + − =α δ α α (A20)Implicitly differentiating:
p
x
Zdxdp Z
= − (A21)
where: p p xZ b (1 )( F )= + α δ − > 0 (the signs follows from the fact that (A20) can only
hold if x( F ) 0δ − > and by assumption bp> 0.)
x x x xx xx x x xxZ b (1 )( F ) b(1 )F (1 )(b F b F ) D= + α δ − − + α − + α + − α
Thus by (A21) dxdp
> 0 if xZ < 0.
Note that by assumption bx > 0, Fxx < 0, bxx < 0, Dxx < 0. Hence, a necessary
condition for dxdp
> 0 is Fx > 0.
We now show that Fx > 0 in the lobbying equilibrium.Let x x< , then since Dxx < 0 it follows that:
x xD D> . (A22) Hence condition (A20) can only hold if:
x xb(1 )( F ) b F+ − −α δ α > x xb(1 )( F ) b F+ − −α δ α (A23)
25 A similar argument holds for xw > x.
25
Since by assumption bx > 0, bxx < 0 then: x xb b,b b< > and since Fxx < 0 then
x xF F> . It follows that the inequality in (A23) can only hold if:F F<
Since x x< , this implies that Fx > 0.Now we show that Fxis declining in α.Upon differentiating Fx with respect to α:
2
xxF x
Fx∂ ∂
=∂ ∂α ∂α
.
By assumption Fxx < 0, thus 2
xF
Fx α∂
≡∂ ∂α
< 0 if x∂
∂α >0.
To sign x∂
∂α consider the welfare function. Recall that as the weight given to welfare,
α, increases, the harvest approaches the welfare maximising rate and welfareapproaches its maximum level. Thus,
x x xW x
(b F bF D )∂ ∂
= + +∂α ∂α
> 0 ∀ α∈ (0, ∞) (A24)
By assumption x xb 0,F 0,b 0,D 0> > > > and it has been shown that xF 0> . Hence
x x x(b F bF D )+ + > 0 . Thus, (A24) can only hold if x∂
∂α > 0. It follows that
2
xF
Fx α∂
≡∂ ∂α
< 0.
Derivation of Equation (8b):The current-value Hamiltonian of the government's utility maximising problem is:H = S + (1 - θ)R(x) + α(b(p,x)h + D(x)+θR(x)) +µ(F(x) - h) (A25)The first-order conditions are:
hdH
S b 0dh
= + − =α µ = 0 (A26a)
x x x x x((1 )R (b h D R ) F )= − − + + + +&µ δµ θ α θ µ (A26b)dH
x F(x) hdµ
= = −& (A26c)
Using the fact that: Sh = b - bxF/(δ - Fx), the steady state equilibrium harvest is givenby:
x x x
x x
b F D R(b )(1 ) 0
F F +
− + − = − −
α σα
δ δ(A26d)
where σ = (1-(θ(1-α))
Proof of Proposition 3a:We first establish the following Lemma which is used to prove the result.Let y = f(x, z) be a continuous differentiable function with fx > 0, fz > 0, fxx < 0 andfzz < 0. Let x' < x" and y' < y"Lemma 1: If fxz> 0 then f(x",z") - f(x",z') > f(x',z") - f(x',z').
Proof: Rearrange the above inequality:f(x",z") - f(x',z") > f(x",z') - f(x',z') (I)
26
Which implies that:f(x' ,z") f(x',z')
x x∂ ∂
>∂ ∂
(II)
Thus:f(x',z") f(x',z')
0x x
∂ ∂− >
∂ ∂(III)
Which implies:
fxz = 2f(x',z')
0x z
∂>
∂ ∂(IV)
Q.E.D.By equation (7b):
S = α(W(xw) - W(xL))Where xwis the welfare maximising stock and xL is the political equilibrium stock andxW > xL.Thus:
w LS W(x ) W(x )R R R
∂ ∂ ∂= α − ∂ ∂ ∂
By Lemma 1 S
0R
∂>
∂ if
2W(x)x R
∂∂ ∂
> 0.
Using equation (8a):W(x) = b(p,x)F(x) + D(x) + R(x)
Thus:
x x x xW
b F bF D Rx
∂= + + +
∂ > 0 (A27)
To sign (A27) note that by assumption bx > 0 , Dx > 0 , Rx > 0 and in Proposition 2 weshow that Fx > 0 in the political equilibrium. Hence (A27) is positive.To assess the effects of a change in R(x) we follow much of the existing literature andintroduce a shift parameter r in (A27) such that dR/dr > 0 (see, e.g. Skonhoft (1999)and Schulze and Skonhoft (1996)). We then represent changes in the transfer byassessing changes with respect to r. This simple device has been frequently employedin the renewable resource literature and obviates the need to restrict the analysis byspecifying particular functional forms.26
Hence:2W
0x r
∂>
∂ ∂.
Thus S
0r
∂>
∂.
Proof of Proposition 3b:To assess the effect of an increase in the transfer, we add a shift parameter r to thetransfer term in (A26d) and rearrange such that this condition is defined as: x x x xZ (b( F ) b F)(1 ) D (r R ) 0≡ − − + − − + =δ α α σ (A28)
26 For instance, if R = a +bxn, then ∂R/∂r > 0 (r = a, b). Hence we can represent increases in the levelor slope of the transfer function.
27
The effect of a marginal increase in the transfer is then determined by dx/dr. As notedabove this is a common technique which has been widely used in renewable resourceproblems (see e.g. Skonhoft (1999)).Upon differentiation and rearrangement:
r
x
dx Zdr Z
= − (A29)
where: Zr = -σ < 0;
x x x xx xx x x xx xxZ b (1 )( F ) b(1 )F (1 )(b F b F ) D R= + α δ − − + α − + α + − α − σ (A30)Since bx > 0, Fxx < 0, bxx < 0, Dxx < 0, and Rxx> (<) 0, then a necessary condition forZx < 0 is Fx > 0. Upon rearrangement of Zx, note that Zx < 0 if:
Fx > xx xxx xx xx
x
R D 1b F b b F ( )
1 2b− σ − α δ − − + ≡ Ψ + α
(A31)
Thus dxdr
< 0 if Fx > Ψ.
Proof of Proposition 3cRearranging (A30), it can be verified that Zx > 0 if:
Rxx < ( )( )x xx x x xx xx1
b F b 2b F b F (1 ) Dδ − − − + α − α ≡ Ωσ
.
Thus, anddxdr
> 0 if Rxx < Ω.
28
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0114 Damania, Richard, and E. Barbier, "Lobbying, Trade and Renewable ResourceHarvesting," April 2001.
0113 Anderson, Kym, " Economy-wide dimensions of trade policy and reform," April2001. (Forthcoming in a Handbook on Developing Countries and the Next Round ofWTO Negotiations, World Bank, April 2001.)
0112 Tyers, Rod, "European Unemployment and the Asian Emergence: Insights from theElemental Trade Model," March 2001. (Forthcoming in The World Economy, Vol.24, 2001.)
0111 Harris, Richard G., "The New Economy and the Exchange Rate Regime," March2001.
0110 Harris, Richard G., "Is there a Case for Exchange Rate Induced ProductivityChanges?", March 2001.
0109 Harris, Richard G., "The New Economy, Globalization and Regional TradeAgreements", March 2001.
0108 Rajan, Ramkishen S., "Economic Globalization and Asia: Trade, Finance andTaxation", March 2001. (Forthcoming in ASEAN Economic Bulletin, 2001.)
0107 Chang, Chang Li Lin, Ramkishen S. Rajan, "The Economics and Politics ofMonetary Regionalism in Asia", March 2001. (Forthcoming in ASEAN EconomicBulletin, 2001.)
0106 Pomfret, Richard, "Reintegration of Formerly Centrally Planned Economies into theGlobal Trading System", February 2001. (Forthcoming in ASEAN EconomicBulletin, 2001).
0105 Manzano, George, "Is there any Value-added in the ASEAN Surveillance Process?"February 2001. (Forthcoming in ASEAN Economic Bulletin, 2001).
0104 Anderson, Kym, "Globalization, WTO and ASEAN", February 2001. (Forthcoming inASEAN Economic Bulletin, 2001).
0103 Schamel, Günter and Kym Anderson, "Wine Quality and Regional Reputation:Hedonic Prices for Australia and New Zealand", January 2001. (Paper presented atthe Annual Conference of the Australian Agricultural and Resource EconomicsSociety, Adelaide, 23-25 January 2001.)
0102 Wittwer, Glyn, Nick Berger and Kym Anderson, "Modelling the World Wine Marketto 2005: Impacts of Structural and Policy Changes", January 2001. (Paperpresented at the Annual Conference of the Australian Agricultural and ResourceEconomics Society, Adelaide, 23-25 January 2001.)
0101 Anderson, Kym, "Where in the World is the Wine Industry Going?" January 2001.(Opening Plenary Paper for the Annual Conference of the Australian Agriculturaland Resource Economics Society, Adelaide, 23-25 January 2001.)
0050 Allsopp, Louise, "A Model to Explain the Duration of a Currency Crisis", December2000.(Forthcoming in International Journal of Finance and Economics)
0049 Anderson, Kym, "Australia in the International Economy", December 2000.(Forthcoming as Ch. 11 in Creating an Environment for Australia's Growth, editedby P.J. Lloyd, J. Nieuwenhuysen and M. Mead, Cambridge and Sydney: CambridgeUniversity Press, 2001.)
0048 Allsopp, Louise, " Common Knowledge and the Value of Defending a FixedExchange Rate", December 2000.
0047 Damania, Richard, Per G. Fredriksson and John A. List, "Trade Liberalization,Corruption and Environmental Policy Formation: Theory and Evidence", December2000.
0046 Damania, Richard, "Trade and the Political Economy of Renewable ResourceManagement", November 2000.
0045 Rajan, Ramkishen S., Rahul Sen and Reza Siregar, "Misalignment of the Baht,Trade Imbalances and the Crisis in Thailand", November 2000.
0044 Rajan, Ramkishen S., and Graham Bird, "Financial Crises and the Composition ofInternational Capital Flows: Does FDI Guarantee Stability?", November 2000.
0043 Graham Bird and Ramkishen S. Rajan, "Recovery or Recession? Post-DevaluationOutput Performance: The Thai Experience", November 2000.
0042 Rajan, Ramkishen S. and Rahul Sen, "Hong Kong, Singapore and the East AsianCrisis: How Important were Trade Spillovers?", November 2000.
0041 Li Lin, Chang and Ramkishen S. Rajan, "Regional Versus Multilateral Solutions toTransboundary Environmental Problems: Insights from the Southeast Asian Haze",October 2000. (Forthcoming in The World Economy, 2000.)
0040 Rajan, Ramkishen S., "Are Multinational Sales to Affiliates in High Tax CountriesOverpriced? A Simple Illustration", October 2000. (Forthcoming in EconomiaInternazionale, 2000.)
0039 Ramkishen S. Rajan and Reza Siregar, "Private Capital Flows in East Asia: Boom,Bust and Beyond", September 2000. (Forthcoming in Financial Markets andPolicies in East Asia, edited by G. de Brouwer, Routledge Press)
0038 Yao, Shunli, "US Permanent Normal Trade Relations with China: What is at Stake?A Global CGE Analysis", September 2000.
0037 Yao, Shunli, "US Trade Sanctions and Global Outsourcing to China", September2000.
0036 Barnes, Michelle L., "Threshold Relationships among Inflation, Financial MarketDevelopment and Growth", August 2000.
