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Strategic entry and externalities in groundwater resources: Evidence from the lab

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  • Liu, Zhuo
  • Suter, Jordan F.
  • Messer, Kent D.
  • Duke, Joshua M.
  • Michael, Holly A.

Abstract

This study uses economics experiments to extend the literature on common-pool resources by focusing on entry investment behavior in a stylized, spatially explicit aquifer. The model consists of a two-stage game, where participants make an entry decision in the first stage and, if they choose to enter, decide how much resource to extract in the second stage. Results show that entry behavior and groundwater pumping decisions are significantly affected by the underlying spatial externalities of the resource. In instances where the impacts of groundwater use are spread across all resource users, we observe both a greater number of users choosing to use the resource and a higher intensity of use. The results support expectations from the model that groundwater management policies should focus on entry in addition to decisions related to the volume of pumping. The results also discern the interplay of entry with both hydrogeologic characteristics of the resource and the option to exit and reveal that the option to exit increases the intensity of extraction as well as initial entry rates.

Suggested Citation

  • Liu, Zhuo & Suter, Jordan F. & Messer, Kent D. & Duke, Joshua M. & Michael, Holly A., 2014. "Strategic entry and externalities in groundwater resources: Evidence from the lab," Resource and Energy Economics, Elsevier, vol. 38(C), pages 181-197.
  • Handle: RePEc:eee:resene:v:38:y:2014:i:c:p:181-197
    DOI: 10.1016/j.reseneeco.2014.07.002
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    Cited by:

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    3. Koppl-Turynaz, Monika, 2015. "Illegal Groundwater Pumping," 2015 Conference (59th), February 10-13, 2015, Rotorua, New Zealand 202577, Australian Agricultural and Resource Economics Society.
    4. Leah H. Palm-Forster & Paul J. Ferraro & Nicholas Janusch & Christian A. Vossler & Kent D. Messer, 2019. "Behavioral and Experimental Agri-Environmental Research: Methodological Challenges, Literature Gaps, and Recommendations," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 73(3), pages 719-742, July.
    5. Eric C. Edwards & Todd Guilfoos, 2021. "The Economics of Groundwater Governance Institutions across the Globe," Applied Economic Perspectives and Policy, John Wiley & Sons, vol. 43(4), pages 1571-1594, December.
    6. Wegmann, J., 2018. "Addressing the institutional challenges of groundwater management in areas of rapid urbanization," 2018 Conference, July 28-August 2, 2018, Vancouver, British Columbia 277268, International Association of Agricultural Economists.
    7. Wu, Shang & Palm-Forster, Leah H. & Messer, Kent D., 2021. "Impact of peer comparisons and firm heterogeneity on nonpoint source water pollution: An experimental study," Resource and Energy Economics, Elsevier, vol. 63(C).
    8. Sayre, Susan Stratton & Taraz, Vis, 2019. "Groundwater depletion in India: Social losses from costly well deepening," Journal of Environmental Economics and Management, Elsevier, vol. 93(C), pages 85-100.
    9. Jordan F. Suter & Sam Collie & Kent D. Messer & Joshua M. Duke & Holly A. Michael, 2019. "Common Pool Resource Management at the Extensive and Intensive Margins: Experimental Evidence," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 73(4), pages 973-993, August.

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    More about this item

    Keywords

    Entry behavior; Spatial externalities; Groundwater; Experimental economics; Common pool resources;
    All these keywords.

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior

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