Accounting for heterogeneous private risks in the provision of collective goods: Controversial compulsory contracting institutions in horizontal hydrofracturing

Common pool resources are frequently analyzed with a simple template: the problem is the tragedy of the commons, and the solution is political institutions. Thus the tragedy of the commons is resolved by governing the commons. In this paper we argue that there is also the possibility of a tragedy of governing the commons. If political institutions lock participants into a certain pattern of resource use, and then there is an exogenous shock – say, a technological change – that increases the risks to one group, then the situation may no longer be a classic common-pool situation and institutions may actually exacerbate, rather than ameliorate distributional conflict. We develop a general model showing that whenever there is heterogeneity in private risks, some technological innovation could potentially turn a previously stable institution into a source of conflict. We take the compelling recent example of horizontal hydrofracturing changing the welfare implications of the institution of compulsory pooling, and use a new individual-level dataset of landowners affected by compulsory pooling in New York to demonstrate the empirical support for our model.