Joint Discussion Paper Series in Economics 34-2014
This paper analyzes resource partnerships and their influence on the environmental quality in a resource-rich country by introducing incomplete contracts, imperfect property rights protection, and a lack of valuation for the environment by the government in the South. Employing numerical simulations, I determine the equilibrium extraction rate, the applied extraction technology, and the environmental quality in dependence of the state of democracy in the resource-rich country. In contrast to what one might expect, under certain circumstances it can be environmentally beneficial to have incomplete contracts that induce the utilization of a suboptimal technology for resource extraction. Further, reducing the holdup problem by shifting bargaining power to the North, is only desirable if the environmental quality increases with a better extraction technology.