Behavioral Anomalies and the Provision of Public Goods
Tests of Social Preference Theories with Non-Economics Students and a Real Commodity - Deborah Kerley, Kent D. Messer, William D. Shulze
Using individuals from the community, we test the different social
preference theories. We do this using a real commodity in a group voting
scenario. This research allows us to examine losses as well as gains and
allows for an examination of even the most recent social preference
theories. We also test to see if individuals are more likely to have
behavior consistent with social preferences if they are explicitly told
what the payoffs of the other individuals are relative to the case where
they are left to guess the payoffs.
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Warm Glow or Helping Hand?: The Role of Incentive Compatibility in Voluntary Contributions - Koji Kotani, Kent D. Messer, William D. Schulze
The aim of this research project is to examine how social preferences change with the context of environment and incentives offered in public goods experiments. The current focus of this project is on how over-contributions are affected by the incentive compatibility and efficiency of the mechanisms. The experimental results show that when the mechanism is incentive compatible, subjects follow self-interested behaviors as predicted by Nash Equilibrium strategies and do not over-contribute. However, when the mechanism is not incentive compatible, subjects do not strictly follow selfish behaviors, but instead provide a helping hand by over contributing. The degree of over-contributions in a voluntary setting is related to the efficiency of the mechanism, and subjects will forgo selfish concerns to a certain degree when the incentive structure indicates that extra help is needed to achieve social optimality. Therefore, the results appear to provide evidence that social preference depends on efficiency concern as well as the incentive compatibility of mechanisms.
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New Hope for the VCM: Experimental Tests of a Model of Social Norms, Context, and Reciprocity - Kent D. Messer, Homa Zarghamee, William D. Schulze, Harry Kaiser
This research examines three contextual factors that may affect compliance with social norms-initial cheap talk, voting, and the status quo of the donation-using the linear voluntary contribution mechanism (VCM). Results with undergraduate business student participants and a low MPCR show that contributions as a percent of income in the last of ten rounds range from 18% for the case of no cheap talk, no voting, and a status quo of not giving to 94% in the case where all three contexts are combined. The results demonstrate that context can make the simple VCM produce sustained efficiencies similar to incentive compatible public-good mechanisms. Furthermore, this research challenges existing models used to explain the VCM that assume a heterogeneous population made up of selfish free-riders and conditional cooperators, since a level of sustained contributions of 94% implies that selfish participants can become cooperators. We propose and test a new model that assumes that individuals have a continuous distribution of tastes for complying with a social norm of complete cooperation. The model and results suggest that this distribution of tastes can be significantly shifted by context and that these tastes shift in response to the behavior of others in complying with a social norm (reciprocity).
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Aspects of inter-temporal preference reversal - Jeffrey T. Prince, Daniel L. Shawhan
Prince and Shawhan are examining several aspects of inter-temporal
preference reversal. They are checking whether individuals exhibit
inter-temporal preference reversal over group outcomes in group,
majority-rule decisions, and whether they do so at a different rate than
in individual decisions. They are also testing whether there is a
difference in rates of inter-temporal preference reversal between males
and females. They are using a novel design that prevents their
experimental results from being explainable by some of the theories that
compete with hyperbolic discounting.
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The Role of Automatic Donations in Increasing Charitable Giving - Homa Zarghamee, Kent D. Messer, William D. Schulze, Harry Kaiser
Experiments are undertaken to assess the viability of self-selected
automatic donations as a substitute for a status quo of giving in the VCM.
In an attempt to replicate a real-world setting as much as possible,
heterogeneous valuations of the public good and non-linear payoffs are
explored.
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Generic Advertising
The Problem of Generic Advertising: An Experimental Analysis - Kent D. Messer, Harry M. Kaiser, William D. Schulze
Producers of many commodities assess themselves for generic advertising, which is a public good for producers and, in cases like generic pharmaceuticals and healthy foods, may enhance social welfare. Though most generic advertising programs were initially funded by the Voluntary Contribution Mechanism, many have become mandatory to mitigate free-riding. This experimental research simulates key economic and psychological details of these programs and produces donation results strikingly similar to an historic example. Because mandatory programs may be declared unconstitutional, the Provision Point Mechanism is tested as an alternative. This research also shows for the first time that a refund-by-request approach establishes a status quo of contributing and reduces free-riding.
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Optimal Institutional Mechanisms for Funding Generic Advertising: An Experimental Analysis - Kent D. Messer, Todd Schmit, Harry M. Kaiser
Given the uncertain legal status of generic advertising programs for agricultural commodities, alternative voluntary funding institutions are investigated that could provide a high level of benefits to producers. This experimental study simulates key economic and psychological factors that affect voluntary producer contributions to generic advertising. The results suggest that producer referenda play a critical role in increasing contributions and that producer surplus is maximized by a provision point mechanism instituted by producer referendum with thresholds ranging from 68% to 90%, and expected funding from 47% to 77% of the time, depending on the level of advertising effectiveness.
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Voluntary Funding for Generic Advertising Using a Provision-Point Mechanism: An Experimental Analysis of Option Assurance - Kent D. Messer, Harry M. Kaiser, Gregory L. Poe
The mandatory nature of check-off programs that fund generic commodity promotion remains a contentious issue. Theoretically and in laboratory environments, a provision-point mechanism with a money-back guarantee offers an attractive alternative to standard voluntary contribution mechanisms. But in practice, few examples of multiple-round provision-point mechanisms exist. A practical concern with applying such provision-point mechanisms is that even a slight shortfall in contributions in a period relative to the designated threshold can force the promotion organization to dismantle its administrative structure with negative consequences for subsequent periods. This study uses experimental economics to test new two-threshold provision-point mechanisms in the context of check-off programs for funding commodity marketing. The two thresholds determine funding for administrative capacity and the actual marketing program separately. Setting a low threshold for administrative costs could preserve the organizational structure even if contributions did not rise to the level of the higher threshold required to fund the marketing program. Then, if future contributions are adequate to fund a campaign, the organizational structure will already be in place. We demonstrate that providing such "option assurance" does not lead to a decrease in overall contributions and, in some settings, can increase producer surplus.
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Electricity Markets
Seams Experiment - Nodir Adilov, Thomas Light, Doug Mitarotonda, Richard Schuler, William D. Schulze, Ray Zimmerman
This experiment studies ways of reducing seams and facilitating the transfer of power between control areas in electricity markets. The experiment allows investigation of the effect of implementing a market (an "arbitrage market") for facilitating real time transfers of power between institutional boundaries. We study the effectiveness of the arbitrage market at (1) eliminating perverse flows across borders (from high price regions to low price regions), (2) enhancing economic dispatch and improve reliability in the presence (and in the absence) of fixed bilateral power contracts, and (3) reducing generator market power.
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Forward Market and Investment Experiment - Nodir Adilov, Thomas Light, Doug Mitarotonda, Richard Schuler, William D. Schulze
This experiment tests theoretical results regarding the implications of forward market timing on competition and generator capacity investments in electricity markets. Theoretical results suggest that long-term forward markets will induce greater investment and more competitive behavior in the spot markets. As the forward market term shortens, we expect these benefits to decrease.
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Two-Sided Electricity Market Experiments - Nodir Adilov, Thomas Light, David Toomey, Richard Schuler, William D. Schulze, Ray Zimmerman
During 2003 and 2004, full two-sided market experiments with experienced suppliers and no market power mitigation mechanisms were conducted that demonstrate: (1) the ability of demand-side programs to mitigate price spikes, (2) the social preference of real-time pricing (RTP) over pre-announced demand side programs (DRP), and (3) the participants' preference for RTP over DRP after having gained experience with both. Subsequent analysis also suggests that power flows on individual lines may be more closely correlated with system load under RTP, than under any other market-based demand side treatments, or under a regulatory regime.
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The Economics and Psychology of Stigma
Assessing the Impact of Media Reports and Industry Food Safety Information related to BSE (aka. Mad Cow Disease) on Consumer's Risk Attitudes and Willingness-To-Pay for Beef - Kent D. Messer, Harry M. Kaiser, Brian Wansink, Collin Payne
Many products and foods have been stigmatized at one time or another. Consider the examples of cyanide in Tylenol bottles, exploding gas tanks that plagued the Ford Pinto, Firestone tire failures on the Ford Explorer, and mad cow disease with beef. The apparent failure of some goods to recover from stigma provides the first motivation for this experimental study. The second motivation is to understand the role of media and industry food safety information on consumer risk attitudes and willingness-to-pay for beef. What happens when people believe that the food supply is no longer safe? For example, consider how unsubstantiated information that led to a food scare and the resultant implication it had on economic behavior. In 1989, Apple growers and processors were faced with reports that a by-product of Alar, a chemical used to time the ripening of apples, was linked with lung and kidney tumors in mice. Although people would have to ingest a vast amount of apples (thousands of quarts of apple juice every day) for a possible negative effect to occur, consumers panicked. As a result, apple growers and processors lost an estimated $250 million and $125 million, respectively. For the most part, this food crisis was reasonably localized and was caused by a misinterpretation of risk. This study looks at consumer reactions to information from the media and industry groups regarding BSE (aka. Mad Cow Disease) and evaluates what messages have a positive or negative impact on consumer risk attitudes and willingness-to-pay for beef. The proposed research will be conducted both in the Laboratory for Experimental Economics and Decision Research and the Cornell Food and Brand Lab with co-investigators from economics and consumer psychology.
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Food and Obesity Prevention
An Exploration of Potential Uses of Behavioral Economics Concepts for Improving the Diets of Food Assistance Program Participants - David R. Just, Brian Wansink, William Shulze, Harry Kaiser, Lisa Mancino (USDA)
We explore the use of various payment mechanisms and other psychological cues in the selection and consumption of food in a school lunch setting. We hope to manipulate behavior through the use of restricted use debit cards versus cash payments for food. We hypothesize that such mechanisms will have disproportionate effects on eating behavior relative to changing prices by an amount equivalent to elicited discount factors.
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Regulation of Nonpoint Source Water Pollution
Exploring the Performance of Ambient-Based Policy Instruments When Nonpoint Source Polluters Can Cooperate - Gregory L. Poe, William D. Schulze, Kathleen Segerson, Jordan F. Suter, Christian A. Vossler
This research explores the relative efficiency of a set of nonpoint source water pollution control policies suggested in the literature that base regulations on group outcomes. Individuals take on the role of firm managers and submit offer prices into an auction market. The number of units that an individual sells in the market determines their earnings as well as their level of emissions. Individuals are then subject to a penalty or a subsidy based on the level of aggregate group emissions plus a stochastic element (“ambient pollution”). We allow individuals within groups to engage in nonbinding communication, thus allowing for collusive behavior. Our findings indicate that ambient policies involving subsidies can result in overabatement when individuals communicate. Policies that charge firms strictly a per unit tax or a fixed penalty when ambient pollution is in excess of the target, however, have higher observed efficiencies when individuals communicate, as the pollution target is met with greater frequency.
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Experiments on Damage-Based Ambient Taxes for Nonpoint Source Polluters - Jordan F. Suter, Christian A. Vossler, Gregory L. Poe, Kathleen Segerson
This research is motivated by the need to regulate nonpoint source water pollution effectively under information constraints when economic damages are potentially a nonlinear function of ambient pollution. In this study we present experimental tests of two tax mechanisms based on observed damages from pollution. Individuals play the role of polluting firms and make an emissions decision in each period. Reducing emissions is costly to the individual, but reduces levels of group pollution and subsequent damages. When individuals are not allowed to communicate, we find that implementing the damage tax mechanism results in emission levels that approximate the social optimum. When individuals can communicate, emissions are considerably below the social optimum, and are consistent with cooperative game-theoretic predictions. In this setting we show that the regulator can set the tax as if regulating one agent, the group, to efficiently achieve the social optimum. Finally, we find that average group emissions are unaffected by changes in the pollution threshold that triggers the tax, but the threshold does affect the observed variability in individual-level emissions.
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Miscellaneous
The Role of Punishment in Mitigating Free-Riding - Pat Barclay
Some researchers have argued that social punishment plays a role in
maintaining group cooperation, and many experiments show that people are
willing to pay to punish those who do not cooperate. However, if
punishment is costly, then those who do not punish do better than those
who do. Our prediction is that punishment can be stable in the face of
non-punishment, but in different ways depending upon the conditions. When
the costs of punishment are low and multiple punishers are necessary for
the punishment to be effective, one would predict that people will follow
a strategy of "reciprocating punishment" where they only punish if others
in the group appear willing to do so also. Conversely, when the costs of
punishment are high and punishment from one person is sufficient to deter
free-riders, one would predict that people will follow a "scrounger"
strategy and only punish if no other group member appears willing to do
so. In conjunction with Michael Price from Washington University (and soon
Brunel University), I will be conducting a study to test whether people
tend to follow this pattern of punishment.
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An Experimental Investigation of Contractual Arrangements and Incentive Structures - David R. Just, Steven Wu (Ohio State University), Brian Roe (Ohio State University)
An attempt to understand how natural reference points, such as reservation wages and the base level of pay, affect behavior under production contracts, and how these behaviors in turn affects the structure of production contracts offered by principals. We hypothesize that under most conditions, individuals will select contracts structured in terms of bonuses rather than deductions.
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Indian Farmers' Valuation of Yield Distributions: Will poor farmers value 'pro-poor' seeds? - Travis Lybbert
Potential poverty traps among the rural poor suggest a need to reduce poor farmers' vulnerability by stabilizing crop yields and limiting yield losses. Advances in biotechnology will help address this need directly with crops that tolerate climate fluctuation or resist biotic stresses. Evaluating ex ante how farmers will value these 'pro-poor' seeds is important for delivery design, but also challenging. This paper describes an experimental economic approach to understanding farmers' valuation of such seeds. Using data from a survey and experiment, I assess Indian farmers' valuation of changes in the mean, variance, and skewness of payoff distributions. These farmers value increases in expected value, but seem indifferent about higher moment changes in payoff distributions. Farmer traits such as wealth and risk exposure affect their valuation of these changes only mildly. While various limitations to the experimental approach must qualify practical implications of these findings, the experiment demonstrates the viability of conducting valuation experiments with open-ended questions in developing countries.
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