Putting Free-Riding to Work: A Partnership Solution to the Common-Property Problem
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.
|Date of creation:||29 Jul 2008|
|Contact details of provider:|| Postal: Ludwigstraße 33, D-80539 Munich, Germany|
Web page: https://mpra.ub.uni-muenchen.de
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Benoit, Jean-Pierre & Krishna, Vijay, 1985. "Finitely Repeated Games," Econometrica, Econometric Society, vol. 53(4), pages 905-922, July.
- Stephan Schott & Neil Buckley & Stuart Mestelman & R. Muller, 2007. "Output sharing in partnerships as a common pool resource management instrument," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 37(4), pages 697-711, August.
- Bergstrom, Theodore C. & Varian, Hal R., 1985. "Two remarks on Cournot equilibria," Economics Letters, Elsevier, vol. 19(1), pages 5-8.
- Brandts Jordi & Macleod W. Bentley, 1995.
"Equilibrium Selection in Experimental Games with Recommended Play,"
Games and Economic Behavior,
Elsevier, vol. 11(1), pages 36-63, October.
- Macleod, B. & Brandts, J., 1992. "Equilibrium Selection in Experimental Games with Recommended Play," UFAE and IAE Working Papers 164.92, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
- Cave, J. & Salant, S., 1992.
"Cartel Quotas Under Majority Rule,"
92-04, Michigan - Center for Research on Economic & Social Theory.
- Baik, Kyung Hwan & Lee, Sanghack, 2001. "Strategic Groups and Rent Dissipation," Economic Inquiry, Western Economic Association International, vol. 39(4), pages 672-684, October.
- Novshek, William., 1984.
"On the Existence of Cournot Equilibrium,"
517, California Institute of Technology, Division of the Humanities and Social Sciences.
- Nitzan, Shmuel, 1991. "Collective Rent Dissipation," Economic Journal, Royal Economic Society, vol. 101(409), pages 1522-1534, November.
- Van Huyck, John B. & Gillette, Ann B. & Battalio, Raymond C., 1992. "Credible assignments in coordination games," Games and Economic Behavior, Elsevier, vol. 4(4), pages 606-626, October.
- Chung, Tai-Yeong, 1996. "Rent-Seeking Contest When the Prize Increases with Aggregate Efforts," Public Choice, Springer, vol. 87(1-2), pages 55-66, April.
- H. Scott Gordon, 1954. "The Economic Theory of a Common-Property Resource: The Fishery," Journal of Political Economy, University of Chicago Press, vol. 62, pages 124-124.
- Oses-Eraso, Nuria & Viladrich-Grau, Montserrat, 2007. "On the sustainability of common property resources," Journal of Environmental Economics and Management, Elsevier, vol. 53(3), pages 393-410, May.
- Sherstyuk, Katerina, 1998.
"Efficiency in partnership structures,"
Journal of Economic Behavior & Organization,
Elsevier, vol. 36(3), pages 331-346, August.
- Baye, Michael R. & Hoppe, Heidrun C., 2003. "The strategic equivalence of rent-seeking, innovation, and patent-race games," Games and Economic Behavior, Elsevier, vol. 44(2), pages 217-226, August.
- Alchian, Armen A & Demsetz, Harold, 1972.
"Production , Information Costs, and Economic Organization,"
American Economic Review,
American Economic Association, vol. 62(5), pages 777-795, December.
- Armen A. Alchian & Harold Demsetz, 1971. "Production, Information Costs and Economic Organizations," UCLA Economics Working Papers 10A, UCLA Department of Economics.
- Russell Cooper & Douglas V. DeJong & Robert Forsythe & Thomas W. Ross, 1992.
"Communication in Coordination Games,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 107(2), pages 739-771.
- COOPER, R. & DEJONG, D.V. & FORSYTHE, R. & Tom Ross, 1989. "Communication In Coordination Games," Carleton Industrial Organization Research Unit (CIORU) 89-07, Carleton University, Department of Economics.
- Tarui, Nori, 2007. "Inequality and outside options in common-property resource use," Journal of Development Economics, Elsevier, vol. 83(1), pages 214-239, May.
- Johnson, Ronald N & Libecap, Gary D, 1982. "Contracting Problems and Regulation: The Case of the Fishery," American Economic Review, American Economic Association, vol. 72(5), pages 1005-1022, December.
- Amartya K. Sen, 1966. "Labour Allocation in a Cooperative Enterprise," Review of Economic Studies, Oxford University Press, vol. 33(4), pages 361-371.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:9804. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter)
If references are entirely missing, you can add them using this form.