Fragility of the commons under prospect-theoretic risk attitudes

Ashish R. Hota, Siddharth Garg and Shreyas Sundaram

Games and Economic Behavior, 2016, vol. 98, issue C, 135-164

Abstract: We study a common-pool resource game where the resource experiences failure with a probability that grows with the aggregate investment in the resource. To capture decision making under such uncertainty, we model each player's risk preference according to the value function from prospect theory. We show the existence and uniqueness of a pure Nash equilibrium when the players have heterogeneous risk preferences and under certain assumptions on the rate of return and failure probability of the resource. Greater competition, vis-a-vis the number of players, increases the failure probability at the Nash equilibrium; we quantify this effect by obtaining bounds on the ratio of the failure probability at the Nash equilibrium to the failure probability under investment by a single user. We further show that heterogeneity in attitudes towards loss aversion leads to higher failure probability of the resource at the equilibrium.

Keywords: Tragedy of the commons; Common-pool resource; Resource dilemma; Risk heterogeneity; Loss aversion; Prospect theory; Inefficiency of equilibria (search for similar items in EconPapers)
JEL-codes: C72 D70 D81 (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:eee:gamebe:v:98:y:2016:i:c:p:135-164

DOI: 10.1016/j.geb.2016.06.003

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