DOES INEQUALITY LEAD TO GREATER EFFICIENCY IN THE USE OF LOCAL COMMONS? THE ROLE OF STRATEGIC INVESTMENTS IN CAPACITY

This paper examines the impact of inequality in access to credit on efficiency in extraction from a common resource. A dynamic model is developed, where agents strategically choose the level of sunk capacity and the consequent extraction path. Sunk capacity is a function of cost of credit and serves as a commitment device to deter entry or force exit. Contrary to previous studies based on static settings, our results show that greater inequality does not necessarily lead to greater efficiency in extraction. In particular, we show that under moderate inequality, the resource stock is lower than that under perfect equality.