Political Weights and Cooperative Solutions to Externality Problems: The Case of Irrigation Water

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1991

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Abstract

"Cooperative technology improvements may ameliorate externalities. However, cooperative solutions may not be achieved without appropriate institutional mechanisms. Here, design of such an institutional mechanism is proposed based on combining aspects of games proposed for public goods and externality problems. A solution concept, an 'acceptable cooperative solution', is also proposed; such a solution would be accepted because it is unanimously preferred to the status quo and to a noncooperative 'threat point.' The proposed institutional design is based on a repeated Prisoner's Dilemma game. Both noncooperative and cooperative outcomes are defined in terms of political weights on game players. Cost shares in the cooperative case are used to cover the cost of joint facilities, and Pigouvian taxes are used to give appropriate information signals. Cost shares are equal to political weights to give incentives for correct demand revelation. At the equilibrium of such a game, a set of political weights is produced corresponding to an acceptable cooperative solution. Concepts are applied to an irrigation externality problem in the Central Valley of California to demonstrate existence of an acceptable solution."

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game theory, cooperation, public goods and bads, prisoner's dilemma, cost benefit analysis, water management

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