Trade and Resource Policy 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, resource policies in both the open loop and Markov Perfect equilibria protect the resource under autarchy; in the open economy these policies exacerbate 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 Svenn Jensen, Leo Simon, Christian Traeger, and seminar participants at Berkeley and at the EARE 20113 meetings in Toulouse. †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 and the Austrian Marshall Fund Foundation 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.