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Putting Free-Riding to Work: A Partnership Solution to the Common-Property Problem

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  • Heintzelman, Martin
  • Salant, Stephen W.
  • Schott, Stephan

Abstract

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.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 9804.

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Date of creation: 29 Jul 2008
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Handle: RePEc:pra:mprapa:9804

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Keywords: partnerships; common property; tragedy of the commons; cartels;

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Cited by:
  1. Daniel T. Kaffine & Christopher J. Costello, 2010. "Unitization of spatially connected renewable resources," NBER Working Papers 16338, National Bureau of Economic Research, Inc.
  2. Salant, Stephen W. & Kotchen, Matthew J., 2009. "A Free Lunch in the Commons," Discussion Papers, Resources For the Future dp-09-30, Resources For the Future.
  3. Evans, Keith S. & Weninger, Quinn, 2010. "Information Sharing and Cooperative Search in Fisheries," Staff General Research Papers, Iowa State University, Department of Economics 31606, Iowa State University, Department of Economics.
  4. Katharine A. Anderson, . "Group Formation with a Network Constraint," GSIA Working Papers, Carnegie Mellon University, Tepper School of Business 2012-E49, Carnegie Mellon University, Tepper School of Business.
  5. Fischer, Carolyn & Laxminarayan, Ramanan, 2010. "Managing partially protected resources under uncertainty," Journal of Environmental Economics and Management, Elsevier, vol. 59(2), pages 129-141, March.
  6. Cherry, Josh & Salant, Stephen & Uler, Neslihan, 2013. "Experimental Departures from Self-Interest when Competing Partnerships Share Output," Discussion Papers, Resources For the Future dp-13-07, Resources For the Future.
  7. Klarl, Torben, 2011. "Market dynamics, dynamic resource management and environmental policy in the context of (strong) sustainability," Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis 48714, Verein für Socialpolitik / German Economic Association.
  8. Neil J. Buckley & Stuart Mestelman & R. Andrew Muller & Stephan Schott & Jingjing Zhang, 2010. "Effort provision and communication in teams competing over the commons," IEW - Working Papers, Institute for Empirical Research in Economics - University of Zurich 503, Institute for Empirical Research in Economics - University of Zurich.
  9. Cherry, Josh & Salant, Stephen & Uler, Neslihan, 2010. "Size Matters (in Output-Sharing Groups): Voting to End the Tragedy of the Commons," Discussion Papers, Resources For the Future dp-10-43, Resources For the Future.
  10. Neil Buckley & Stuart Mestelman & R. Andrew Muller & Stephan Schott & Jingjing Zhang, 2009. "Shut Up and Fish: The Role of Communication when Output-Sharing is used to Manage a Common Pool Resource," Department of Economics Working Papers 2009-15, McMaster University.
  11. Torben Klarl, 2013. "Market dynamics, dynamic resource management and environmental policy in the context of (strong) sustainability," Journal of Evolutionary Economics, Springer, Springer, vol. 23(4), pages 861-888, September.
  12. Costello, Christopher & Kaffine, Daniel T., 2010. "Marine protected areas in spatial property-rights fisheries," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, Australian Agricultural and Resource Economics Society, vol. 54(3), September.
  13. Bernard, Mark & Dreber, Anna & Strimling, Pontus & Eriksson, Kimmo, 2013. "The subgroup problem: When can binding voting on extractions from a common pool resource overcome the tragedy of the commons?," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 91(C), pages 122-130.

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