Common Pool Resources with Endogenous Equity Shares

Abstract

We consider a common pool resource (CPR) where, in the first stage, every firm chooses an equity share on its rivalsiproOts (cross-ownership) and, in the second stage, firms compete for the resource. We identify equilibrium equity shares in this setting, and compare them against the socially optimal shares that maximize welfare. Our results show that equity shares are welfare improving under certain conditions, but can lead to a socially insufficient exploitation of the CPR if shares are large enough; as in a merger where firms equally share equity. We also found that, as the number of firms exploiting the resource increases, socially excessive exploitation occurs under larger parameter combinations. We analyze common policy tools, such as quotas and emission fees, evaluating how they are a§ected by equity shares; and then compare them against a novel policy tool: optimal equity taxes.