Can Rationing Rules for Common Resources Impact Self-insurance Decisions?

Abstract

When users have ex-ante demands over a common resource and when resource size is not sufficient to cover all the individual demands, there is a need to establish a rationing rule. I test whether the choice of the rationing rule impacts the individual decision to self-insure, i.e. to invest in a secure alternative resource, instead of relying on a free but uncertain common resource. Four rationing rules, empirically relevant for water management, are compared using a laboratory experiment. According to Nash predictions, the investment in self-insurance is the same with the four rules. However, the experimental data show that agents' decisions are impacted by the rule. Coordination on the optimal self-insurance level is higher with the no allocation rule. However, total gains are higher with the constrained-equal awards rule, and their variability is reduced. Rules which are defined as a proportion of posted demands, such as the proportional and constrained-equal losses rules, induce sub-optimal levels of self-insurance.

Axiomatic and game-theoretic analysis of bankruptcy and taxation problems: An update

“…• An experimental study of an enriched model in which agents strategically choose how much of a resource to invest in order to protect themselves against uncertainty in aggregate supply and possible shortages, and of the dependence of these decisions on the rule that is used to allocate shortages (the proportional, constrained equal awards, constrained equal losses rules are considered) is due to Lefebvre (2013).…”