When a group of users who share a commonpool resource through a system of licenses is exposed to the risk of shortage, there is a need to establish a sharing rule. Such sharing rule is likely to impact the individual decisions to self-insure, i.e., to rely on a secure but costly resource instead of the free but uncertain common-pool resource. We determine the optimal sharing rule and the optimal diversification between the common-pool resource and the safe resource as a function of the agents’ individual characteristics, the distribution of the common-pool resource availability, and the cost of the safe resource. We find that, for a group of agents with heterogenous risk preferences, a perfectly informed regulator can obtain the optimal diversification level by imposing a rationing rule which shares the resource between agents proportionally to their relative risk tolerance. We illustrate and interpret our results in the context of water management in France.
Sharing rules for common-pool resources when self-insurance is available
14 January 2014