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Cooperation, incentives and punishment in common pool resource management

Managing water quality is of critical interest to policy-makers in New Zealand and globally. In particular, the management of diffuse nitrate losses from agriculture is a major policy challenge that remains largely unsolved. In a policy environment with a strong emphasis on collaboration, consideration has been given to whether groups of resource users can address the issue collectively at a catchment scale. Although water quality is not a traditional common pool resource problem, in the presence of some form of external threat or regulation associated with degradation, the diffuse loss of nitrate to waterways is transformed into a common pool resource problem. This social dilemma is characterised by strong incentives to defect and challenging levels of complexity. However, these challenges are not insurmountable. This study uses economic experiments to present groups of participants with a stylised version of the problem faced by resource users in the field. Previous experiments in this area have found sanctions to be of limited effectiveness in this environment in the absence of communication. We extend previous studies by adjusting the ratio of the cost of sanctions to their effectiveness, and by varying the overall payoff environment. We find that more effective sanctions are able to improve environmental outcomes and stabilise the level of resource use over time, even in the absence of communication. However, there are significant costs associated with the use of sanctions which mean that overall welfare is not enhanced in the absence of communication. Due to the complexity of common pool resource management, communication and agreement about norms for resource use levels is important to support groups in optimising environmental outcomes and profitability. Communication is a necessary condition for maximising welfare when navigating complexity. However, communication is not necessary to improve environmental outcomes or sustain a level of resource use over time. While some self-selected groups of highly-cooperative individuals may be able to sustain cooperation in the absence of sanctions, these arrangements are unlikely to be stable over time. The presence of defectors means that some form of recourse to punishment is necessary to support the continued sustainable management of a resource. The strong incentives for defection in common pool resource management, including collective management of water quality, can be overcome by sufficiently strong sanctions. Our experimental findings suggest that sanctions administered by peers can be effective in improving environmental outcomes and stabilising the level of resource use over time, preventing the decline in cooperation that is evident where individuals are able to profit from defection. The cost and effectiveness of sanctions has a strong interaction with the nature of the incentive environment. In designing institutions for the collective management of nitrate loads to water bodies, regulators and groups of resource users must consider the incentives for defection that are driven by the degree of coupling of nitrate losses and profitability in farm systems. In order to be successful, group members must have access to low-cost sanctions that are designed with the incentive environment in mind. If institutions can be designed in such a way as to ensure that cheaters do not prosper from defection, the prospects for collective management of water quality are positive.
Type of thesis
Parsons, O. J. (2016). Cooperation, incentives and punishment in common pool resource management (Thesis, Master of Management Studies (MMS)). University of Waikato, Hamilton, New Zealand. Retrieved from https://hdl.handle.net/10289/10645
University of Waikato
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