| Abstract: |
This study proposes a new mechanism for the resource curse: crowding-out of
innovation due to the existence of an option to engage in conflict. Using a
game theoretical framework, it is argued that an increase in the amount of
natural resources (in the informal sector here conflict for a common-pool rent
materializes) reduces the incentives of entrepreneurial groups to engage in
cost-reducing R&D (in the non-resource sector where production occurs).
Compared to most models of the resource curse, the impact of resource
abundance on income and welfare was interestingly observed to be
non-monotonic. An increase in the amount of resources in the common pool
induces intensified conflict among groups and less R&D investment. Depending
on the relative strengths of the income and diversion effects, three scenarios
were exhibited. First, there is a 1.) Pure Blessing. This happens when both
the extent of technological spillovers and the initial level of resource are
low. Starting from scarcity, the increase in natural resource generates an
overall jump in the groups' income levels. Even if an increase in resources
decreases innovation in the formal sector, both income and welfare still go
up. Meanwhile, for intermediate initial values of the natural resource, there
is a 2.) Pseudo-curse. A resource boom induces an immediate income effect.
However, this income gain is dominated by the indirect diversion effect due to
lower output and higher price (because of less cost-reducing R&D).
Consequently, while income increases, the welfare of the economy decreases.
The range of resource levels where this occurs is greater when spillovers are
high. Finally, a 3.) Double Curse occurs for extremely high initial levels of
natural resources. Both aggregate income of the economy and welfare suffer. |