Commons as a risk-management tool: theoretical predictions and an experimental test

Date: 2014-04
By: Marielle Brunette (Laboratoire d’Economie Forestière, INRA – AgroParisTech)
Philippe Delacote (Laboratoire d’Economie Forestière, INRA – AgroParisTech)
Serge Garcia (Laboratoire d’Economie Forestière, INRA – AgroParisTech)
Jean-Marc Rousselle (INRA, UMR 1135 LAMETA)
URL: http://d.repec.org/n?u=RePEc:lef:wpaper:2014-06&r=net
The impact of the safety-net use of Common-pool resources (CPR) on the individual investment into and extraction from the commons is analyzed in this paper. Agents of the community first choose to invest in their private project and in the CPR; second, they choose how much to extract from their private project and the commons. The model compares two types of risk management tool: CPR as risk-coping and risk-diversification mechanisms. It also compares two types of risk: risk on a private project and risk on CPR investment by other community members. The theoretical predictions are empirically tested with experimental economics. In this view, we propose an original CPR game composed of two periods, an investment one and an extraction one. Our result clearly shows that risk reduction in the private project unambiguously decreases investment in the CPR, while it does not impact CPR extraction. We also show that a risk-coping strategy is well understood as more flexible and influenced by the outcome in terms of private project yield.
Keywords: Common-pool resource, Common-pool resource game, deforestation, experimental economics.
JEL: Q15 Q23 D71 D81
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Just Luck: An Experimental Study of Risk-Taking and Fairness

Cappelen, Alexander W., James Konow, Erik Ø. Sørensen, and Bertil Tungodden. 2013. “Just Luck: An Experimental Study of Risk-Taking and Fairness." American Economic Review, 103(4): 1398-1413. DOI: 10.1257/aer.103.4.1398; Online Appendix (307.82 KB) | Download Data Set (215.97 KB)

Abstract

Choices involving risk significantly affect the distribution of income and wealth in society. This paper reports the results of the first experiment, to our knowledge, to study fairness views about risktaking, specifically whether such views are based chiefly on ex ante opportunities or on ex post outcomes. We find that, even though many participants focus exclusively on ex ante opportunities, most favor some redistribution ex post. Many participants also make a distinction between ex post inequalities that reflect differences in luck and ex post inequalities that reflect differences in choices. These findings apply to both stakeholders and impartial spectators.

Prospect theory: An analysis of decision under risk

Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica: Journal of the Econometric Society, 263-291. uoregon.edu 提供的 [PDF]

==notes by yinung==
近數十年來, 影響最大的文章之一, 修正了期望效用理論的一些不合理的部份。
本文大量使用機率組合之選擇,以實驗 (問受試者) 的選擇,來解釋 EU 的不合理。
==original Abstract==
This paper presents a critique of expected utility theory as a descriptive model of decision making under risk, and develops an alternative model, called prospect theory. Choices among risky prospects exhibit several pervasive effects that are inconsistent with the basic tenets of utility theory. In particular, people underweight outcomes that are merely probable in comparison with outcomes that are obtained with certainty. This tendency, called the certainty effect, contributes to risk aversion in choices involving sure gains and to risk seeking in choices involving sure losses. In addition, people generally discard components that are shared by all prospects under consideration. This tendency, called the isolation effect, leads to inconsistent preferences when the same choice is presented in different forms. An alternative theory of choice is developed, in which value is assigned to gains and losses rather than to final assets and in which probabilities are replaced by decision weights. The value function is normally concave for gains, commonly convex for losses, and is generally steeper for losses than for gains. Decision weights are generally lower than the corresponding probabilities, except in the range of low probabilities. Overweighting of low probabilities may contribute to the attractiveness of both insurance and gambling.

Production economics in the presence of risk

Shankar, S. (2012). Production economics in the presence of risk*. Australian Journal of Agricultural and Resource Economics, 56(4), 597-620.  Wiley;

==original Abstract==

This paper provides an overview of the literature on production under the influence of risk. Various specifications of stochastic production function such as models with additive and multiplicative uncertainty, Just and Pope model, output-cubical, state-allocable and state-general models are discussed. Further, criteria determining optimal producer behaviour are derived for deterministic production technology and for various kinds of state-contingent technologies such as output-cubical, state-specific, state-allocable and state-general technologies. Finally, a brief discussion is presented about the drawbacks of each of these specifications of technology.

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Are Behavioral Choices in the Ultimatum and Investment Games Strategic?

Date: 2012-09
By: Lora R. Todorova (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)
Bodo Vogt (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)
URL: http://d.repec.org/n?u=RePEc:mag:wpaper:120021&r=net
This paper experimentally examines the relationship between self-reporting risk preferences and behavioral choices in the subsequently played dictator, ultimatum and investment games. The results from these experiments are used to discern the motivational bases of behavioral choices in the ultimatum and investment games. The focus is on investigating whether strategic considerations are important for strategy selection in the two games. We find that self-reporting risk preferences does not alter the dictators’ offers and trusters’ investments, while it significantly decreases the proposers’ offers and leads to a substantial decrease in the amount trustees give back to their partners. We interpret these results as evidence that the decisions of proposers in the ultimatum game and trustees in the investment game are strategic.
Keywords: coordination game, dictator game, ultimatum game, investment game, questionnaire, risk scale, risk preferences
JEL: C7