Income sharing for common pool resources with uncertain productivity

Abstract

Abstract We address the interconnected issues of externalities in the use of a natural common‐pool resource system and adverse effects of environmental uncertainty on risk‐averse resource users. We set up a simple analytical model and derive conditions such that insurance by means of an income sharing mechanism mitigates externalities and hence achieves a socially optimal outcome. For this to materialize, we show that the sharing rule must be sufficiently sensitive to individual contributions and specifically show that a simple proportional sharing rule can provide incentives for both efficient contributions to the income pool and efficient use of the resource system.