Intergenerational Conflicts and the Resource Policy Formation of a Short-Lived Government

This paper studies the political economy of resource management in an OLG framework with an intertemporal externality problem. The externality arises because a common resource used for production is depleted by production of "dirty" goods. An intergenerational conflict arises because the young generation cares about the level of current production of dirty goods. This is so because production of dirty goods affects the future availability of the resource. The old, on the other hand, has no such a concern. We assume that they lobby the government to affect the policy choice - an upper limit on the resource use allowed for production of dirty goods - in their favour. Within a dynamic common agency framework, we study stationary equilibria focussing on a particular class of strategies which we called "Take It or Leave It"(TIOLI) strategies, where a lobby makes a positive contribution only when her payoff maximising policy is implemented. It is shown that political competition may lead to a "greener" environment policy and to less resource exploitation than in an unregulated economy. More surprisingly, we also find that resource exploitation may be lower in political equilibrium than in an economy run by a social planner.