Effects of Inequality and Transmissivity in a Common Pool Aquifer - Theory, Experimental Evidence and Policy Implications

Title: EFFECTS OF INEQUALITY AND TRANSMISSIVITY IN A COMMON POOL AQUIFER – THEORY, EXPERIMENTAL EVIDENCE AND POLICY IMPLICATIONS Tarik Chfadi, Ph.D., 2013 Directed By: Professor Robert. G. Chambers, Department of Agricultural and Resource Economics The early literature on common pool resources focused on the race for appropriation among users and its damaging effects on the resource stock and on the aggregate welfare of all users. The differential game framework was widely used to examine each user’s actions under non-cooperative management and to assess the losses from deviating from an optimal resource management under cooperation. Interest has recently shifted toward the effects of characteristics such as heterogeneity among users and level of commonality in the resource on the use of common resources. This article is interested in combining both effects: I consider a dynamic model of a common pool aquifer with a finite transmissivity used by two farmers with dissimilar efficiencies. I unravel the players’ behavior under different strategies and estimate their respective profits in order to evaluate the welfare effects of inequality and transmissivity. Solving for the aggregate profit of all players allowed me to revisit of a widespread result found in the common pool resource literature, which is that well enforced property rights are always associated with higher profitability; indeed, in the case of highly unequal players I reach a rather counterintuitive result as increasing transmissivity is proven to increase the overall profits. Such a result was never established in the literature at hand. However, on the distributional aspect, the model shows that the benefits of less efficient users always suffer from more transmissivity, even when the inequality is high enough to generate a raise in aggregate profits. For the validation of my theoretical results I carried out a series of experiments in the experimental laboratory at the Department of Agricultural and Resource Economics with volunteer subjects recruited from the University of Maryland. I used four experimental treatments. In the first two treatments the transmissivity is infinite; the players are highly differentiated in one treatment and identical in the other. The last two treatments are a replica of the earlier ones but with no transmissivity. The laboratory data were compared to the theoretical solution following four benchmark paths: the social optimum, the subgame perfect equilibrium, the semi-myopic, and the myopic. The results show that the decisions of a significant share of players follow the myopic path. All the theoretical findings were corroborated by the experimental results including the increasing effect of transmissivity in the presence of users highly unequal. In Chapter 5 on policy implications, I try to extend the analysis on the combined (or individual) effects of transmissivity and inequality on the aquifer use to the case when the possibility of communication between users, or the existence of a central agency, allows the emergence of alternative resource management modes. The first mode corresponds to the case of social optimum resource management; when users coordinate their actions to maximize the benefits to the community from the aquifer. The second mode of management corresponds to the case where, from a certain round, only one user, a priori the most effective, is allowed to use the resource, while the other user abandons extraction activities for the remaining duration of the game.