Mitigating the Tragedy of the Commons through Cooperation: An Experimental Evaluation

In a commons, each firmʹs costs rise with industry output. This externality can be mitigated if firms jointly restrict harvests, but higher prices result. Repeated interaction usually facilitates cooperation that lowers harvest rates. Increased cooperation suggests there should be more firms in the socially optimal market structure. Using experimental markets with two to five “firms,” we observe the influence of industry size on harvest rates. Cooperation increases the socially optimal number of firms in markets when there are static externalities, but not for dynamic externalities. Finally, even when the initial stock is low, there is little tendency toward resource extinction