Strategic investment behavior and externalities when accessing groundwater resources: Evidence from the lab
Date
2012
Authors
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Journal ISSN
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Publisher
University of Delaware
Abstract
Entry behavior in accessing a common-pool resource is critical to efficient use of that
resource, especially when natural characteristics of the resource and economic constraint
complicate user’s behavior. Unlike previous work on groundwater resources, this study
uses laboratory experiments to investigate firms’ entry investment behaviors. In a twostage
game, participants choose between two production possibilities in the first stage
(the entry decision) and then decide in the second stage how much of the resource to
extract if they enter. The study supports the importance of the resource’s spatial
externalities in influencing firms’ entry behaviors. The study also finds out the
significance of spatial externalities in affecting both the total social efficiency and entry
efficiency. The greatest efficiency loss was found in decisions to enter a mixed privatepublic
aquifer. In addition, entry efficiencies were 6.55% lower when participants had an
option to exit. Participants in the laboratory demonstrated strategic behavior when
accessing and extracting water from the resource with a high degree of interaction
between entry and extraction. These results suggest that groundwater management
policies should focus on entry and consider interplay of entry with both hydrogeological characteristics of the resource and the options to exit, along with the extraction behavior.
Policies designed to increase efficiency should take those characteristics and economic
conditions into account and differentiate incumbent and potential entrants. One example
is to use differentiated taxes based on spatial natures of the CPR, economic conditions
and the players.