Trade and Resource Sustainability with Overlapping Generations∗

Trade changes incentives to protect an open-access natural resource. In an OLG setting, the capital asset market transfers policy-induced future gains and losses to the current asset owner. The asset market creates incentives for agents currently alive to protect the natural resource under autarchy. Trade reverses these incentives. In a dynamic political economy, agents without bequest motives choose resource-protecting policies in both the open loop and Markov Perfect equilibria under autarchy; in the open economy agents choose policies exacerbating the open-access distortion, harming the resource. The difference arises from the interplay of the asset market and general equilibrium effects. Trade generally lowers welfare. ∗The paper benefitted from comments by Emma Aisbett, Thibault Fally, Svenn Jensen, Leo Simon, Christian Traeger, and seminar participants at Berkeley, Vienna, SURED 2012, and the EARE 2013 meetings in Toulouse. Financial support from the Austrian Marshall Plan Fund Foundation is gratefully acknowledged. †Department of Agricultural and Resource Economics, University of California, Berkeley, and the Ragnar Frisch Center for Economic Research, email: [email protected]. Larry Karp thanks the Ragnar Frisch Centre for Economic Research for financial support. ‡Department of Socio-Economics, Vienna University of Economics and Business, Nordbergstr. 15 / B / 4, 1090 Vienna, Austria; email: [email protected]. Armon Rezai thanks the Department of Agricultural and Resource Economics at UC Berkeley for its hospitality.