Collective risk-taking in the commons

Abstract

The management of natural commons is typically subject to threshold effects. If individuals are risk-averse, some of the recent economic literature holds that uncertainty on the threshold may have a positive impact by lowering incentives to over-consume. The paper shows that, this intuitive result may unravel when uncertainty is modeled as a discrete or multimodal distribution. Using a variant of the Nash demand game with two thresholds, two types of Nash equilibria typically coexist: cautious (respectively, dangerous) equilibria in which agents coordinate on the low threshold (resp. the high threshold). When both types of equilibria coexist, the symmetric dangerous equilibrium is always Pareto dominated by the symmetric cautious equilibrium, and the latter is always Pareto efficient. We use an experimental setting to assess the severity of the coordination and equilibrium selection problem. While cautious (resp. dangerous) play is decreasing (resp. increasing) in the probability that the threshold is high, coordination failures are salient for intermediate probabilities where the likelihood of coexistence of both type of equilibria is high. We find that there is a U-shaped relationship between overall coordination and the probability that the threshold is high.