Relationship Between Natural Resources and Institutions
Abstract: This article analyses the relationship between institutions’ quality and natural resources through a rent seeking model. Depending on the quality of the institutions, each country has a specific structural capacity to stand natural resources dependency. It is shown that there exists a threshold for each country, so that beyond this point, any additional amount of natural resources begins to have a negative impact on institutions. As the stock of natural resources increases, the expected profitability of rent seeking improves which, in turn, lowers the quality of institutions. The mechanism stems from a new balance of power within the country. However, the intensity of institutional degradation is determined by social interactions and depends on both the nature of resources and their appropriability level. The inverse U-shaped curve obtained by empirical studies, presented in this article, supports the notion of non-monotonic effect of natural resources on the institutions found in the model.
