Strategic Behavior and the Environment > Vol 3 > Issue 3

Can Rationing Rules for Common Resources Impact Self-insurance Decisions?

Marianne Lefebvre, UMR 5474 Lameta, F-34000 Montpellier France and European Commission (DG Joint Research Center, IPTS), Spain, marianne.lefebvre@ec.europa.eu
 
Suggested Citation
Marianne Lefebvre (2013), "Can Rationing Rules for Common Resources Impact Self-insurance Decisions?", Strategic Behavior and the Environment: Vol. 3: No. 3, pp 185-222. http://dx.doi.org/10.1561/102.00000029

Published: 16 Mar 2013
© 2013 M. Lefebvre
 
Subjects
Environmental Economics,  Public Economics
 
Keywords
Q28C92Q25
BankruptcyCommon-pool resourceCoordinationExperimentRisk aversionSelf-insuranceRationing rulesWater management
 

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In this article:
Introduction
Experimental Design
Results
Conclusion
Appendix A: Nash Equilibrium Predictions
Appendix B: Experimental Instructions
References

Abstract

When users have ex-ante demands over a common resource and when resource size is not sufficient to cover all the individual demands, there is a need to establish a rationing rule. I test whether the choice of the rationing rule impacts the individual decision to self-insure, i.e., to invest in a secure alternative resource, instead of relying on a free but uncertain common resource. Four rationing rules, empirically relevant for water management, are compared using a laboratory experiment. According to Nash predictions, the investment in self-insurance is the same with the four rules. However, the experimental data show that agents' decisions are impacted by the rule. Coordination on the optimal self-insurance level is higher with the no allocation rule. However, total gains are higher with the constrained-equal awards rule, and their variability is reduced. Rules which are defined as a proportion of posted demands, such as the proportional and constrained-equal losses rules, induce sub-optimal levels of self-insurance.

DOI:10.1561/102.00000029