The ecological insurance trap

Abstract

Common pool resources often insure individual livelihoods against the collapse of private endeavors. When endeavors based on private and common pool resources are interconnected, investment in one can put the other at risk. We model Senegalese pastoralists who choose whether to grow crops, a private activity, or raise livestock on common pool pastureland. Livestock can increase the likelihood of locust outbreaks via ecological processes related to grassland degradation. Locust outbreaks damage crops, but not livestock, which are used for savings and insurance. We show the incentive to self-protect (reduce grazing pressure) or self-insure (increase livestock levels) changes with various property rights schemes and levels of ecological detail. If the common pool nature of insurance exacerbates the ecological externality even fully-informed individuals may make risk management decisions that increase the probability of catastrophe, creating an “insurance trap.”