Heintzelman, Martin and Salant, Stephen W. and Schott, Stephan (2008): Putting Free-Riding to Work: A Partnership Solution to the Common-Property Problem.
Download (194kB) | Preview
The common-property problem results in excessive mining, hunting, and extraction of oil and water. The same phenomenon is also responsible for excessive investment in R&D and excessive outlays in rent-seeking contests. We propose a "Partnership Solution" to eliminate or at least mitigate these excesses. Each of N players joins a partnership in the first stage and chooses his effort in the second stage. Under the rules of a partnership, each member must pay his own cost of effort but receives an equal share of the partnership's revenue. The incentive to free-ride created by such partnerships turns out to be beneficial since it naturally offsets the excessive effort inherent in such problems. In our two-stage game, this institutional arrangement can, under specified circumstances, induce the social optimum in a subgame-perfect equilibrium: no one has a unilateral incentive (1) to switch to another partnership (or create a new partnership) in the first stage or (2) to deviate from socially optimal actions in the second stage. The game may have other subgame-perfect equilibria, but the one associated with the ``Partnership Solution'' is strictly preferred by every player. We also propose a modification of the first stage which generates a unique subgame-perfect equilibrium. Antitrust authorities should recognize that partnerships can have a less benign use. By organizing as competing partnerships, an industry can reduce the ``excessive'' output of Cournot oligopoly to the monopoly level. Since no partner has any incentive to overproduce in the current period, there is no need to deter cheating with threats of future punishments.
|Item Type:||MPRA Paper|
|Original Title:||Putting Free-Riding to Work: A Partnership Solution to the Common-Property Problem|
|Keywords:||partnerships;common property;tragedy of the commons;cartels|
|Subjects:||Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q5 - Environmental Economics
L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L12 - Monopoly; Monopolization Strategies
|Depositing User:||Stephen W. Salant|
|Date Deposited:||04. Aug 2008 05:51|
|Last Modified:||13. Feb 2013 11:28|
References  James M. Acheson and Roy J. Gardner. Spatial strategies and territoriality in the maine lobster industry. Rationality and Society, 17(3):309-341, 2005.
 Armen A. Alchian and Harold Demsetz. Production, information costs, and economic organization. American Economic Review, 62(5):777-795, December 1972.
 Kyung Hwan Baik and Sanghack Lee. Strategic groups and rent dissipation. Economic Inquiry, 39(4):672-684, October 2001.
 Michael R. Baye and Heidrun C. Hoppe. The strategic equivalence of rentseeking, innovation, and patent-race games. Games and Economic Behavior, 44:217-226, 2003.
 Andrea Bender, Wolfram Kagi, and Ernst Mohr. Informal insurance and sustainable management of common-pool marine resources in ha'apai, tonga. Economic Development and Cultural Change, 50(2), January 2002.
 Jean-Pierre Benoit and Vijay Krishna. Finitely repeated games. Econometrica, 53(4), 1985.
 Theodore C. Bergstrom and Hal R. Varian. Two remarks on cournot equilibrium. Economics Letters, 19(1):5-8, 1985.
 Jordi Brandts and W. Bentley MacLeod. Equilibrium selection in experimental games with recommended play. Games and Economic Behavior, 11:36-63, 1995.
 Colin F. Camerer. Behavioral Game Theory : Experiments in Strategic Interaction. The Roundtable Series in Behavioral Economics. Princeton University Press, Princeton, NJ, 2003.
 Donald Campbell. Incentives: Motivation and the Economics of Information. Cambridge University Press, Cambridge, 1995.
 Jonathan Cave and Stephen W. Salant. Cartel quotas under majority rule. The American Economic Review, 85(1):82-102, March 1995.
 Tai-Yeong Chung. Rent-seeking contest when the prize increases with aggregate eforts. Public Choice, 87(1-2):55-66, April 1996.
 Russell Cooper, Douglas DeJong, Robert Forsythe, and Thomas Ross. Communication in coordination games. The Quarterly Journal of Economics, 107, 1992.
 B. Curtis Eaton, Diane F. Eaton, and Douglas W. Allen. Microeconomics, 5th Edition. Prentice Hall, Toronto, 2002.
 David Feeny, Fikret Berkes, Bonnie J. McCay, and James M. Acheson. The tragedy of the commons: Twenty-two years later. Human Ecology, 18(1), 1990.
 H. Scott Gordon. The economic theory of a common-property resource: The Fishery. Journal of Political Economy, 62:124-42, April 1954.
 Bengt Holmstrom and Jean Tirole. Theory of the Firm. Handbook for Industrial Organization, Volume 1, 1989. Edited by Richard Schmalensee and Robert D. Willig, Elsevier Press.
 John B. Van Huyck, Ann B. Gilette, and Raymond C. Battalio. Credible assignments in coordination games. Games and Economic Behavior, 4:606-626, 1992.
 Ronald N. Johnson and Gary D. Libecap. Contracting problems and regulation: The case of the fishery. The American Economic Review, 72(5):1005-1022,December 1982.
 Wolfram Kagi. The tragedy of the commons revisited: Sharing as a means to avoid environmental ruin. IWOE Discussion Paper 91, Institute for Economy and the Environment, University of St. Gallen, August 2001.
 Shmuel Nitzan. Collective rent dissipation. The Economic Journal, 101(409):1522-1534, November 1991.
 W. Novshek. On the existence of cournot equilibrium. Review of Economic Studies, 52:85-98, 1985.
 Nuria Oses-Eraso and Montserrat Viladrich-Grau. On the sustainability of common property resources. Journal of Environmental Economics and Management, 53(3):393-410, May 2007.
 Jean-Phillippe Platteau and Erika Seki. Community arrangements to overcome market failures: Pooling groups in japanese Fisheries. In M. Aoki and Y. Hayami, editors, Market, Community, and Economic Development. Clarendon Press, Oxford, 2000.
 Marshall Sahlins. Stone Age Economics. Aldine de Gruyter, New York, 1972.
 Thomas C. Schelling. The Strategy of Conflict. Harvard University Press, 1960.
 Stephan Schott, Neil Buckley, Stuart Mestelman, and R. Andrew Muller. Output sharing in partnerships as a common pool resource management instrument. Environmental and Resource Economics, 37(4):697-711, August 2007.
 Amartya K. Sen. Labour allocation in a cooperative enterprise. Review of Economic Studies, 33(4):361-371, 1966.
 Katerina Sherstyuk. Efficiency in partnership structures. Journal of Economic Behavior and Organization, 36:331-346, 1998.
 Nori Tarui. Inequality and outside options in common-property resource use. Journal of Development Economics, 83:214-239, 2007.