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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.

Suggested Citation

  • Heintzelman, Martin & Salant, Stephen W. & Schott, Stephan, 2008. "Putting Free-Riding to Work: A Partnership Solution to the Common-Property Problem," MPRA Paper 9804, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:9804
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    References listed on IDEAS

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    Cited by:

    1. Kotchen, Matthew J. & Salant, Stephen W., 2011. "A free lunch in the commons," Journal of Environmental Economics and Management, Elsevier, vol. 61(3), pages 245-253, May.
    2. 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, vol. 91(C), pages 122-130.
    3. Jan Tore Solstad & Kjell Arne Brekke, 2011. "Does the Existence of a Public Good Enhance Cooperation among Users of Common-Pool Resources?," Land Economics, University of Wisconsin Press, vol. 87(2), pages 335-345.
    4. Alexandre CROUTZET & Pierre LASSERRE, 2016. "Optimal Completeness of Property Rights on Renewable Resources in Presence of Market Power," Cahiers de recherche 10-2016, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
    5. Katharine A. Anderson, "undated". "Group Formation with a Network Constraint," GSIA Working Papers 2012-E49, Carnegie Mellon University, Tepper School of Business.
    6. Christopher Costello & Daniel T. Kaffine, 2010. "Marine protected areas in spatial property-rights fisheries ," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 54(3), pages 321-341, July.
    7. 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 503, Institute for Empirical Research in Economics - University of Zurich.
    8. Torben Klarl, 2013. "Market dynamics, dynamic resource management and environmental policy in the context of (strong) sustainability," Journal of Evolutionary Economics, Springer, vol. 23(4), pages 861-888, September.
    9. Keith Evans & Quinn Weninger, 2014. "Information Sharing and Cooperative Search in Fisheries," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 58(3), pages 353-372, July.
    10. Josh Cherry & Stephen Salant & Neslihan Uler, 2015. "Experimental departures from self-interest when competing partnerships share output," Experimental Economics, Springer;Economic Science Association, vol. 18(1), pages 89-115, March.
    11. 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.
    12. 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.
    13. Cherry, Josh & Salant, Stephen & Uler, Neslihan, 2010. "Size Matters (in Output-Sharing Groups): Voting to End the Tragedy of the Commons," Discussion Papers dp-10-43, Resources For the Future.
    14. Zhou, Rong & Segerson, Kathleen, 2014. "Individual vs. Collective Quotas in Fisheries Management: Efficiency and Distributional Impacts," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 170601, Agricultural and Applied Economics Association.
    15. Kaffine Daniel T & Costello Christopher, 2011. "Unitization of Spatially Connected Renewable Resources," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(1), pages 1-31, March.
    16. repec:spr:annopr:v:238:y:2016:i:1:d:10.1007_s10479-015-2099-7 is not listed on IDEAS
    17. 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.
    18. repec:eee:resene:v:49:y:2017:i:c:p:16-32 is not listed on IDEAS

    More about this item

    Keywords

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

    JEL classification:

    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies

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