Collective Risk-Taking in the Commons

CIRPEE Working Paper 11-05

34 Pages Posted: 18 Feb 2011 Last revised: 11 Dec 2017

See all articles by Olivier Bochet

Olivier Bochet

New York University Abu Dhabi

Jérémy Laurent-Lucchetti

University of Geneva

Justin Leroux

HEC Montreal - Institute of Applied Economics; CIRANO

Bernard Sinclair-Desgagne

SKEMA Business School - Sophia Antipolis Campus

Date Written: September 21, 2017

Abstract

The management of natural commons is typically subject to threshold effects: past a certain agregate consumption level, the benefits of the commons will be lost for everybody. As dealing with the global climate illustrates, moreover, it is often impossible to locate an actual threshold with certainty. If individuals are risk averse, the economic literature holds that the presence of such uncertainty can have a positive impact by lowering incentives to over-consume. We point out that this intuitive result - whereby a collective behaves consistently with some widespread individual trait - unravels when the representation of uncertainty is a discrete or multimodal distribution. Using a variant of the Nash demand game where the maximal amount to be shared can be either high or low, we find that a group of risk-averse agents can collectively behave as if the real threshold was the low one, thereby ending up in a `cautious equilibrium,' but also as if the threshold was high, which leads to a `dangerous equilibrium.' Yet more, cautious equilibria are Pareto efficient while dangerous equilibria are not. In an experiment next set to test this finding, we do observe the occurrence of dangerous equilibria even when every group members display risk aversion. The frequency of dangerous equilibria is positively correlated with the likelihood that the actual threshold is the high one. It is only when the likelihood of having a high threshold goes down enough that individual risk aversion translates into high rates of cautious equilibria. Some implications for the design of environmental agreements are discussed.

Keywords: Common-pool resources, ecological thresholds, divide-the-dollar game, coalition-proof Nash equilibrium

JEL Classification: Q50, C72, D74

Suggested Citation

Bochet, Olivier and Laurent-Lucchetti, Jérémy and Leroux, Justin and Sinclair-Desgagne, Bernard, Collective Risk-Taking in the Commons (September 21, 2017). CIRPEE Working Paper 11-05. Available at SSRN: https://ssrn.com/abstract=1762050 or http://dx.doi.org/10.2139/ssrn.1762050

Olivier Bochet

New York University Abu Dhabi ( email )

PO Box 129188
Abu Dhabi
United Arab Emirates

HOME PAGE: http://https://sites.google.com/site/obochet2/

Jérémy Laurent-Lucchetti

University of Geneva ( email )

102 Bd Carl-Vogt
Genève, CH - 1205
Switzerland

Justin Leroux (Contact Author)

HEC Montreal - Institute of Applied Economics ( email )

3000, ch. de la Côte-Ste-Catherine
Montréal, Quebec H3T 2A7
Canada

CIRANO ( email )

2020 rue University, 25th floor
Montreal H3C 3J7, Quebec
Canada

Bernard Sinclair-Desgagne

SKEMA Business School - Sophia Antipolis Campus ( email )

60 rue Dostoïevski
Sophia Antipolis, 06902
France

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