Vote and trade: An efficient mechanism for common-pool resource management with stock externalities

Abstract

The efficiency of inter-temporal resource allocation in a rights-based common-pool resource management system can be compromised by a stock externality. This occurs when one user’s extraction depletes the resource stock and then raises future harvesting costs for all users. This paper introduces a vote-and-trade (VAT) mechanism, an enhancement to standard cap-and-trade (CAT), to correct this inefficiency. VAT operates in two stages: first, resource users vote to set a binding, period-specific extraction cap; second, they trade the resulting rights in a within-period market. Our theoretical model demonstrates that while standard CAT is dynamically inefficient, VAT can achieve the social optimum under mild conditions by using voting to aggregate agents’ private information and collectively choose the optimal inter-temporal extraction path. Laboratory experiments confirm this prediction, showing that VAT substantially outperforms CAT in aggregate economic efficiency.