Does inequality lead to greater efficiency in the use of local commons? The role of strategic investments in capacity

This paper examines how inequality in access to credit affects the strategic behavior of users of a common resource in their investment and extraction decisions. A dynamic two-stage game is developed in which agents choose the level of sunk investment in capacity and the consequent extraction path. The results show that agents invest in excess capacity, except when inequality is very high. The relation between inequality and efficiency in resource extraction is found to be non-monotonic, with the steady-state resource stock being closest to the optimal level when either inequality is very high or very low. (C) 2003 Elsevier Science (USA). All rights reserved.