Collective Risk-Taking in the Commons

Abstract

The management of natural commons is typically subject to threshold effects: past a certain agregate consumption level, the benefits of the commons will be lost for everybody. As dealing with the global climate illustrates, moreover, it is often impossible to locate an actual threshold with certainty. If individuals are risk averse, the economic literature holds that the presence of such uncertainty can have a positive impact by lowering incentives to over-consume. We point out that this intuitive result - whereby a collective behaves consistently with some widespread individual trait - unravels when the representation of uncertainty is a discrete or multimodal distribution. Using a variant of the Nash demand game where the maximal amount to be shared can be either high or low, we find that a group of risk-averse agents can collectively behave as if the real threshold was the low one, thereby ending up in a `cautious equilibrium,' but also as if the threshold was high, which leads to a `dangerous equilibrium.' Yet more, cautious equilibria are Pareto efficient while dangerous equilibria are not. In an experiment next set to test this finding, we do observe the occurrence of dangerous equilibria even when every group members display risk aversion. The frequency of dangerous equilibria is positively correlated with the likelihood that the actual threshold is the high one. It is only when the likelihood of having a high threshold goes down enough that individual risk aversion translates into high rates of cautious equilibria. Some implications for the design of environmental agreements are discussed.

Keywords: Common-pool resources, ecological thresholds, divide-the-dollar game, coalition-proof Nash equilibrium

JEL Classification: Q50, C72, D74