Splitting an Uncertain (Natural) Capital
Justin Leroux and
No 11-01, Cahiers de recherche from HEC Montréal, Institut d'économie appliquée
Most natural commons are subject to discontinuities and threshold effects, so their gradual depletion may result in a sudden irreversible loss of the associated ecological services. Yet, it is often impossible to locate these thresholds with certainty. We analyze this context using a variant of the divide-the-dollar game, in which the amount to be split among players follows a discrete or multimodal probability distribution. ‘Cautious equilibria’ – where agents collectively behave as if the worst-case scenario were certain - are found to coexist with ‘dangerous equilibria’ - where overall demand for ecological services might lead to their collapse - and ‘dreadful equilibria’ - where agents collectively request so much natural capital that a collapse of ecological services is certain, even if all agents are risk averse. Communication/cooperation among agents, however, which raises the possibility of coordinated group deviations, would eliminate dreadful equilibria and reduce the occurrence of dangerous equilibria, while cautious equilibria are robust to such deviations. A direct corollary is that dangerous equilibria are Pareto-dominated by any cautious equilibrium in which all agents claim less natural capital. These results shed light on the management of common-pool resources, international climate change negotiations, and the implementation of precautionary policies.
Keywords: Common-pool resources; Ecological thresholds; Divide-the-dollar game; Coalition-proof Nash equilibrium (search for similar items in EconPapers)
JEL-codes: C72 D74 Q50 (search for similar items in EconPapers)
Pages: 28 pages
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Working Paper: Splitting an Uncertain (Natural) Capital (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:iea:carech:1101
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