Can Incomplete Information Lead to Under-Exploitation in the Commons?

Abstract

This paper analyzes the protection of a common pool resource (CPR) through the management of information. Specifically, we examine an entry deterrence model between an incumbent perfectly informed about the initial stock of a CPR and an uninformed potential entrant. In our model, the appropriation of the CPR by the incumbent reduces both players'future profits from exploiting the resource. In the case of complete information, we show that the incumbent operating in a high-stock common pool overexploits the CPR during the first period since it does not internalize the negative external effct that its first-period exploitation imposes on the entrant's future profits. This inefficiency, however, is absent when the common totally regenerates across periods. Under incomplete information, we identify an additional form of inefficiency. In particular, the incumbent operating in a low-stock CPR underexploits the resource in order to signal the low available stock to potential entrants, deterring entry. When the common fully regenerates, we show that such underexploitation becomes more significant since the low-stock incumbent aims to protect its larger monopoly profits.

Keywords: Common Pool Resources, Signaling Games, Externalities

JEL Classification: L12, D82, Q20, D62