Natural resources, rent seeking and welfare

A new and very simple mechanism to explain why natural resource abundance may lower income and welfare is developed. In a model with rent seeking, a greater amount of natural resources increases the number of entrepreneurs engaged in rent seeking and reduces the number of entrepreneurs running productive firms. With a demand externality, it is shown that the drop in income as a result of this is higher than the increase in income from the natural resource. More natural resources thus lead to lower welfare. (C) 2002 Elsevier Science B.V All rights reserved.