Strategic entry and externalities in groundwater resources: Evidence from the lab

• Models show spatial externalities influence groundwater resource entry and pumping behavior.
• Results confirm model that entry and pumping are affected by aquifer spatial externalities.
• Providing an exit option increases initial entry rates and pumping rates.
• Both entry and extraction rates are higher than is socially optimal.
• Regulatory policies should focus on both entry and pumping behavior.

This study uses economics experiments to extend the literature on common-pool resources by focusing on entry investment behavior in a stylized, spatially explicit aquifer. The model consists of a two-stage game, where participants make an entry decision in the first stage and, if they choose to enter, decide how much resource to extract in the second stage. Results show that entry behavior and groundwater pumping decisions are significantly affected by the underlying spatial externalities of the resource. In instances where the impacts of groundwater use are spread across all resource users, we observe both a greater number of users choosing to use the resource and a higher intensity of use. The results support expectations from the model that groundwater management policies should focus on entry in addition to decisions related to the volume of pumping. The results also discern the interplay of entry with both hydrogeologic characteristics of the resource and the option to exit and reveal that the option to exit increases the intensity of extraction as well as initial entry rates.