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

Posted: 12 Dec 2008

See all articles by Martin D. Heintzelman

Martin D. Heintzelman

affiliation not provided to SSRN

Stephen W. Salant

University of Michigan; Resources for the Future

Stephan Schott

Carleton University

Date Written: October 2, 2008

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.

Keywords: Catch-sharing, Cartelization, Cooperatives, Hunter-gatherer, Team Production

Suggested Citation

Heintzelman, Martin D. and Salant, Stephen W. and Schott, Stephan, Putting Free-Riding to Work: A Partnership Solution to the Common-Property Problem (October 2, 2008). Journal of Environmental Economics and Management, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1314852

Martin D. Heintzelman (Contact Author)

affiliation not provided to SSRN

Stephen W. Salant

University of Michigan ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States
313-764-2370 (Phone)
313-764-2769 (Fax)

Resources for the Future ( email )

1616 P Street, NW
Washington, DC 20036
United States

Stephan Schott

Carleton University ( email )

1125 colonel By Drive
Ottawa, Ontario K1S 5B6
Canada

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