Environmental Economics – Lecture 7 Voluntary Contributions: Behavioral aspects and experimental evidence Florian K. Diekert March 12, 2015 Nyborg & Rege (2003); List & Price (2013); Noussair & van Soest (2014) ECON 4910, L7. Slide 1/ 19
Review last lecture (Cost-Benefit Analysis) 1. Choosing A over B or a heuristic definition of CBA 2. Cost-benefit analysis in a static and certain world ◮ Tests for marginal and non-marginal projects ◮ CBA and social welfare functions 3. Dynamic aspects 4. Accounting for uncertainty, risk, and irreversibility ECON 4910, L7. Slide 2/ 19
Preview this lecture 1. Overview: Behavioral and experimental economics 2. Private contributions to public good ◮ Home economicus ◮ Pure altruism ◮ Impure altruism ◮ Social norms 3. Using experiments to inform environmental policy ◮ Identifying and testing leverage points for policy ◮ Informing Cost-Benefit analysis and market approaches ECON 4910, L7. Slide 3/ 19
Overview: Behavioral and experimental economics Two wikipedia definitions: ◮ Behavioral economics “studies the effects of psychological, social, cognitive, and emotional factors on economic decisions” ◮ “Experimental economics is the application of experimental methods to study economic questions.” ECON 4910, L7. Slide 4/ 19
Overview: Behavioral and experimental economics Two wikipedia definitions: ◮ Behavioral economics “studies the effects of psychological, social, cognitive, and emotional factors on economic decisions” ◮ “Experimental economics is the application of experimental methods to study economic questions.” A typology of experiments: ECON 4910, L7. Slide 4/ 19
Overview: Behavioral and experimental economics Two wikipedia definitions: ◮ Behavioral economics “studies the effects of psychological, social, cognitive, and emotional factors on economic decisions” ◮ “Experimental economics is the application of experimental methods to study economic questions.” A typology of experiments: ◮ “Lab experiments” test theory in the lab by making use of randomization to identify the treatment effect (Example: behavioral experiment at universities) ECON 4910, L7. Slide 4/ 19
Overview: Behavioral and experimental economics Two wikipedia definitions: ◮ Behavioral economics “studies the effects of psychological, social, cognitive, and emotional factors on economic decisions” ◮ “Experimental economics is the application of experimental methods to study economic questions.” A typology of experiments: ◮ “Lab experiments” test theory in the lab by making use of randomization to identify the treatment effect (Example: behavioral experiment at universities) ◮ “Artefactual experiments” mimic lab experiments with non-standard subjects in the field (Example: behavioral experiment with fishermen) ECON 4910, L7. Slide 4/ 19
Overview: Behavioral and experimental economics Two wikipedia definitions: ◮ Behavioral economics “studies the effects of psychological, social, cognitive, and emotional factors on economic decisions” ◮ “Experimental economics is the application of experimental methods to study economic questions.” A typology of experiments: ◮ “Lab experiments” test theory in the lab by making use of randomization to identify the treatment effect (Example: behavioral experiment at universities) ◮ “Artefactual experiments” mimic lab experiments with non-standard subjects in the field (Example: behavioral experiment with fishermen) ◮ “Framed field experiments” studies choices in “the real world”, but subjects are aware of study (Example: Medicine testing) ECON 4910, L7. Slide 4/ 19
Overview: Behavioral and experimental economics Two wikipedia definitions: ◮ Behavioral economics “studies the effects of psychological, social, cognitive, and emotional factors on economic decisions” ◮ “Experimental economics is the application of experimental methods to study economic questions.” A typology of experiments: ◮ “Lab experiments” test theory in the lab by making use of randomization to identify the treatment effect (Example: behavioral experiment at universities) ◮ “Artefactual experiments” mimic lab experiments with non-standard subjects in the field (Example: behavioral experiment with fishermen) ◮ “Framed field experiments” studies choices in “the real world”, but subjects are aware of study (Example: Medicine testing) ◮ “Natural field experiments” are conducted in environments where subjects naturally undertake tasks and are unaware that their behavior is studied (Example: Info on electricity bill) ECON 4910, L7. Slide 4/ 19
Behavioral evidence for neoclassical economic theory ◮ Around 20%-40% of respondents choose to “cooperate” in a one-shot Prisoner-dilemma game ECON 4910, L7. Slide 5/ 19
Behavioral evidence for neoclassical economic theory ◮ Around 20%-40% of respondents choose to “cooperate” in a one-shot Prisoner-dilemma game ◮ Subjects offer positive amounts in Dictator game ECON 4910, L7. Slide 5/ 19
Behavioral evidence for neoclassical economic theory ◮ Around 20%-40% of respondents choose to “cooperate” in a one-shot Prisoner-dilemma game ◮ Subjects offer positive amounts in Dictator game ◮ Many respondents reject small offers in Ultimatum game ECON 4910, L7. Slide 5/ 19
Behavioral evidence for neoclassical economic theory ◮ Around 20%-40% of respondents choose to “cooperate” in a one-shot Prisoner-dilemma game ◮ Subjects offer positive amounts in Dictator game ◮ Many respondents reject small offers in Ultimatum game ◮ Subjects invest and return positive amounts in Trust game ECON 4910, L7. Slide 5/ 19
Behavioral evidence for neoclassical economic theory ◮ Around 20%-40% of respondents choose to “cooperate” in a one-shot Prisoner-dilemma game ◮ Subjects offer positive amounts in Dictator game ◮ Many respondents reject small offers in Ultimatum game ◮ Subjects invest and return positive amounts in Trust game Results have been shown to hold in a wide variety of societies around the globe. ECON 4910, L7. Slide 5/ 19
Behavioral evidence for neoclassical economic theory ◮ Around 20%-40% of respondents choose to “cooperate” in a one-shot Prisoner-dilemma game ◮ Subjects offer positive amounts in Dictator game ◮ Many respondents reject small offers in Ultimatum game ◮ Subjects invest and return positive amounts in Trust game Results have been shown to hold in a wide variety of societies around the globe. Results are sensitive to “framing effects” ECON 4910, L7. Slide 5/ 19
Identifying and testing leverage points for policy Dynamics and Punishment (Fehr and G¨ achter, 2000): ECON 4910, L7. Slide 6/ 19
Identifying and testing leverage points for policy Dynamics and Punishment (Fehr and G¨ achter, 2000): ECON 4910, L7. Slide 7/ 19
Behavioral evidence for neoclassical economic theory ◮ Around 20%-40% of respondents choose to “cooperate” in a one-shot Prisoner-dilemma game ◮ Subjects offer positive amounts in Dictator game ◮ Many respondents reject small offers in Ultimatum game ◮ Subjects invest and return positive amounts in Trust game Results have been shown to hold in a wide variety of societies around the globe. Results are sensitive to “framing effects” Are these social preferences salient in multi person social dilemmas? ECON 4910, L7. Slide 8/ 19
Private contributions to public good ◮ Homo economics: Positive, but inefficiently low, provision of public goods. When the “public” is large, individual contributions are predicted to be very low. ◮ But people do pay taxes, recycle household waste, give to charities etc. ◮ Discuss theoretical predictions and empirical evidence for various alternative behavioral models ECON 4910, L7. Slide 9/ 19
Private contributions to public good ◮ Homo economics: Positive, but inefficiently low, provision of public goods. When the “public” is large, individual contributions are predicted to be very low. ◮ But people do pay taxes, recycle household waste, give to charities etc. ◮ Discuss theoretical predictions and empirical evidence for various alternative behavioral models ◮ Special focus on the role of public policy (“crowding out” / “crowding in”) ◮ Govt provision incomplete crowding out: by < 28 cent (field), and ca. 70-75 cent (lab) ◮ Subsidies crowd out completely or more: estimated price least bw. -0.8 u -1.3. Studies showing that monetary reward reduce volunteering ECON 4910, L7. Slide 9/ 19
Homo oeconomicus ◮ Model: max u ( x i ) + v ( E ) s.t. x i + g i = w i and E = E 0 + � i g i ◮ FOC for interior solution: u ′ ( x i ) = v ′ ( E ) ◮ Positive contribution only if v ′ ( E − i ) > u ′ ( w i ) where E − i is env.quality if g i = 0, treated as exogenous ◮ Implications: Dollar-for-dollar crowding out when v ′ ( E − i ) ≤ u ′ ( w i ). Govt has no impact on private provision otherwise. As n grows, only the richest contribute. ECON 4910, L7. Slide 10/ 19
Pure altruism ◮ Difficult to model. Simple example: max u ( x i ) + v ( E ) + k ( E ) s.t. x i + g i = w i and E = E 0 + � i g i ◮ Almost no effect on aggregate giving ◮ Dollar for dollar crowding out ECON 4910, L7. Slide 11/ 19
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