Understanding an economic dilemma : essays on common property resources

Abstract

There are many economic environments in which individual incentives do not generate enough group cooperation. This dissertation investigates an instance of such a social dilemma - the use of a common property resource - and a special class of institutions that can promote the socially optimal outcome, namely self-governing institutions. Self-governance exists when the users themselves manage the common resource in a decentralized fashion through legal institutions. The analysis is carried out from three distinct perspectives. The first perspective is an economic analysis of the property rights arrangements and an application of tools of game theory to a field case study. Between the 13th and the 19th centuries, many communities in the Italian Alps negotiated and enforced contracts (Carte di Regola) in order to efficiently manage their common pastures and forests. A comparison between two potential solutions to the Tragedy of the Commons, self-governance and informal cooperation through repeated interaction, leads to three conclusions. First, some legal arrangements were necessary to support even a repeated game solution. Second, under certain conditions, the cost of building legal institutions was repaid by large gains in efficiency. Third, since the benefits of the institutions were a public good, and since the users themselves were in charge of creating and administering the institutions, there were insufficient individual incentives to build them. This induced collective action problem was overcome by repeated interaction among the users. A simplified version of the monitoring and sanctioning mechanism devised historically to enforce the regulations on common resources is studied through a set of experiments. Individual users were allowed to inspect other users at their own cost, and impose a predetermined sanction (a fine) when a free rider was discovered. The fine was paid to the user who found a violator. This experimental economics study finds three classes of results. First, the mechanism is very effective in raising efficiency of resource use. Second, the classical model of identical, selfish agents does not describe the data as well as a model based on heterogeneous and other-regarding preferences, where altruism and spite play important roles. Third, this other-regarding agent model also explains important paradoxes that can be found in the existing literature. Finally, an alternative explanation for the success of the monitoring and sanctioning institution as the result of the interaction with bounded rationality is examined. While keeping selfish preferences, limitations are put on the ability of decision makers to maximize and behave strategically by employing a genetic algorithm with memory sets. The simulations carried out replicate most aspects of the data with human agents. Interestingly, less sophisticated adaptive agents exhibit a higher degree of individual heterogeneity. In addition, the impact of the process that generates new ideas is explored by comparing uniform binary mutation with two other alternatives.