Voluntarily Relinquishing Private Property Rights: The Existence of Risk-Pooling Equilibria When Facing Environmental Uncertainty

Abstract

As weather patterns across the globe change in response to global warming, we should expect more strain on existing institutions. This paper demonstrates how weather risk induces farmers into a risk-pooling equilibrium whereby private property rights are voluntarily relinquished. We find that as the spacial variability of rainfall increases, rising investment and increased subplot dispersion are complementary hedges against weather risk. With subplot dispersion, the cost of preserving private property rights rises, incentivizing farmers to develop a system of common property rights. In contrast, investment and subplot dispersion become substitute hedges as weather risk diminishes. We provide a dynamic theoretical model which complements previous empirical work on the impact of weather risk on property rights.