An Efficient Mechanism to Mitigate Stock Externalities in Rights-Based Common-Pool Resource Management: Theory and Experiments

Abstract

The inter-temporal resource allocation efficiency of a rights-based common-pool resource management system is threatened by a stock externality when one user’s extraction lowers the resource stock and raises the extraction cost for others. This paper proposes a novel decentralized rights-based allocation mechanism (DRAM) to restore the efficiency loss. DRAM includes two stages. In a voting stage, agents collectively determine a binding extraction target for each period via weighted majority voting; in a market stage, agents trade extraction rights assigned to them within each period. We build a theoretical model to illustrate the efficiency loss from a standard property rights market and demonstrate that DRAM can implement the socially optimal allocation under mild conditions. Laboratory experiments confirm that DRAM outperforms the standard property rights market in aggregate economic efficiency.

Keywords: Common-pool resource management, stock externality, dynamic efficiency, property rights market, Voting