Climate Change, Inequality, and Hoarding

Climate change threatens the supply of vital, life-sustaining resources, creating shortages that will last longer and occur more frequently than in the past. Extreme weather and changed precipitation patterns will disrupt water and food supplies for some very large and populous regions throughout the world, and electricity supply for regions dependent upon hydropower. This paper explores the dynamics of how climate-induced shortages could induce hoarding of these resources, exacerbating economic inequality and creating the potential for civil unrest. Hoarding takes place when expectations form that prices will be higher or availability will be lower in the future (or both). This paper sets forth a two-period, two-agent model of hoarding, in which one agent is able to bid up the price of some good that is elastic at high quantities, but inelastic at low quantities. Hoarding is both socially and privately inefficient, but if climate change renders the supply of vital resources uncertain or volatile (or both), then hoarding becomes a rational course of action for those who can afford it. For those that cannot afford it, welfare losses in the inelastic region of demand are likely to be very high.