The role of information in the tragedy of the commons

Felix Munoz-Garcia; Ana Espinola-Arredondo

Specifically, we investigate the signaling role of the incumbent’s exploitation of the resource and how its action conveys or conceals information to entrants. Moreover, we examine the incumbent’s incentives to deter entry, and how those individual incentives serve as a tool to preserve the common pool resource without the need of government intervention. As a benchmark for comparison, we first analyze a setting of complete information, in which both incumbent and entrant perfectly observe the initial stock of the CPR. In this context, the potential entrant prefers to stay out when the initial stock is low, which implies that the incumbent is the only agent exploiting the resource across time. Hence, the incumbent fully internalizes the negative effect that an increase in its first-period appropriation imposes on its future profits. As a consequence, the incumbent exploits the resource at the socially optimal level. On the contrary, when the initial stock is high, the entrant decides to exploit the resource, and both agents compete for the CPR in the second period. In this setting, the tragedy of the commons emerges, since incumbent and entrant do not internalize the negative effect of its appropriation on each other’s profits. Besides this second-period inefficiency, we identify an additional form of inefficiency arising in the first period. In particular, the incumbent ignores the effect that its first-period appropriation imposes on the entrant’s future profits, thereby exploiting the resource above its socially optimal level. Therefore, when the stock is high, inefficiencies emerge in both periods and the CPR is over-exploited. We then discuss a setting of asymmetric information in which only the incumbent is informed. We identify two types of equilibrium outcomes: one in which information is fully transmitted to the potential entrant – referred to as the “informative equilibrium” – and another in which information about the CPR’s stock is concealed, denoted as the “uninformative equilibrium.” In the informative equilibrium, the low-and high-stock incumbents select different first-period appropriation levels, thus allowing the potential entrant to infer the CPR’s stock. Specifically, the high-stock incumbent exploitation coincides with that under complete information, and thus the CPR is over-exploited along both periods. The low-stock incumbent, in contrast, reduces its first-period appropriation below its complete information level as a signal to the potential entrant that the resource is scarce and that entry is unprofit able. Importantly, since the low-stock incumbent’s appropriation under complete information was socially optimal, the informative equilibrium predicts that the incumbent under-exploits the resource during the first period in order to deter entry. Hence, the incumbent’s strategic incentives help protect the CPR. Unlike the informative equilibrium, in which the incumbent’s first-period appropriation conveys information about the CPR’s stock to the potential entrant, in the uninformative equilibrium, both types of incumbent choose the same exploitation level. Hence, the potential entrant cannot infer additional information from the incumbent’s actions and chooses to stay out when the CPR is likely to be scarce. Specifically, this equilibrium prescribes that the low-stock incumbent’s exploitation coincides with that under complete information, which is socially optimal. The high-stock incumbent, however, mimics the low-stock firm, reducing its first-period appropriation, in order to mislead the potential entrant and deter entry. Such under-exploitation of the resource is hence inefficient, and emerges from the presence of incomplete information. This result suggests that the incumbent operating a high-stock commons can deter entry as if it owned a property right for the use of the resource. Therefore, the informational asymmetry among players acts in this case as an “implicit protection right” for the incumbent. The strategy profile described in the informative equilibrium explains the appropriation decisions of the Hudson’s Bay Company. As discussed in Mason and Polasky (1994), in the eighteenth century, the company faced the threat of entry from French fur traders, and at that moment the company increased beaver harvests. Rather than dissuading them from entering, French fur traders built an outpost in the area in 1741. Hence, the over-exploitation of the resource by the Hudson’s Bay Company could be interpreted by the French fur traders as a signal that the resource was abundant. If, in contrast, the CPR is scarce, our equilibrium results suggest that the incumbent strategically under-exploits the resource in order to convey the scarcity of the CPR to the potential entrant and deter entry. Silver hake fishing provides an interesting example of this type of informative signaling. After two decades of intense exploitation by mechanized United States and Canadian fishing boats in the North Atlantic from 1960 to 1980, the avail able stock of silver hake became significantly depleted. This low stock led to a reduction in the number of vessels and annual catches. More importantly, the incumbent fleet had consistently under-exploited the resource below its annual sustain able catch since the late 1990s, despite experiencing a mild recovery (United Nations Food and Agriculture Organization 2005). This strategy can be rationalized as a signal to potential entrants, informing them that the stock has not yet become sufficiently abundant to support the entry of additional vessels. Under-exploitation is not only applic able to the silver hake, but it also has been reported in several other fishing grounds. For instance, Haughton (2002) highlights the underuse of blackfin tuna, dolphinfish, and diamondback squids, among others, in the Caribbean region. Similarly, a comprehensive study by the United Nations Food and Agriculture Organization (2005) indicates the under-exploitation of the Argentine anchovy in the Southern Atlantic and the yellowfin sole in the Pacific Northwest. One could argue that the underexploitation observed in these examples might be partially explained by the difficulty of access to the resource or the fishing technology. Our study suggests that, while these technological reasons can lead to under-exploitation of a CPR, the presence of incomplete information exacerbates such under-exploitation under certain conditions. We also compare the efficiency properties of informative and uninformative equilibria. When the CPR’s stock is abundant, we show that the informative equilibrium supports an over-exploitation of the commons, while the uninformative equilibrium predicts an under-exploitation of the resource. A precise policy recommendation would hence depend on which type of inefficiency (under-or over-exploitation) society prefers to avoid the most. If social preferences assign a larger welfare loss to the over-exploitation than to the under-exploitation of the commons, then our results imply that environmental regulators can increase social welfare by promoting the uninformative equilibrium. In particular, this equilibrium can be supported by setting a first-period quota that specifies strong penalties for those incumbents exceeding the first-period appropriation that both types of incumbent select under the uninformative equilibrium. Intuitively, these penalties make the informative equilibrium appropriation less attractive for the high-stock incumbent, inducing it toward uninformative equilibrium appropriation levels. Our findings hence provide an additional role for quotas – a policy tool often used to deal with CPRs. Related literature. Many authors have analyzed how to avoid the tragedy of the commons in a CPR. We can group them into two different areas, in which studies either (1) modify individual payoffs so that agents’ strategic incentives become different from those in a CPR game (Ostrom 1990; Ostrom et al. 1994); or (2) insert the unmodified CPR game into an enlarged structure – for example, allowing the game to be repeated over time (Baland and Platteau 1996). This chapter contributes to the second approach by analyzing a CPR game in a context of incomplete information. Similar to this study, theoretical and experimental papers have analyzed the role of uncertainty in the profitability of the CPR (Suleiman and Rapoport 1988; Suleiman et al. 1996; Apesteguia 2006). This literature, however, assumes that all players have access to the same information about the resource, thus not allowing for information asymmetries among firms. Our study hence contributes to this literature by, first, examining information settings in which an incumbent holds more accurate information about a resource than potential entrants, which might apply to many CPRs such as fisheries; and second, showing under which conditions the incumbent might choose to actually overprotect the commons. The research also relates to the literature on entry deterrence in the commons (Mason and Polasky 1994) assuming complete information among players. By allowing for incomplete information and signaling, we compare equilibrium behavior under complete and incomplete information. Therefore, this chapter relates to the literature on entry deterrence in signaling games. Usual entry deterrence models assume that the incumbent’s first-period action (e.g., price setting by a monopolist) does not affect the incumbent and entrant’s future profits (Milgrom and Roberts 1982; Matthews and Mirman 1983; Bagwell and Ramey 1990). In our setting, in contrast, the incumbent’s first-period exploitation depletes the CPR, thus affecting its second-period profits. More importantly, it also affects the entrant’s second-period profits, thus imposing a negative external effect on the entrant, unlike Polasky and Bin (2001), who assume that agents do not compete for the same stock in the commons. Our study hence provides an explicit analy

The role of information in the tragedy of the commons

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