Fairness and the Willingness to Pay for Impure Public Goods Mark Andor Manuel Frondel Stephan Sommer RWI – Leibniz-Institute for Economic Research Vienna, 09-06-2017
Introduction Experimental Design Results Conclusion Fairness 1 ”The absence [...] of fairness [...] is one of the most striking contrasts between [...] economic theory and lay intuitions about human behavior” (Kahneman et al. 1986) 2 Rabin (1993) incorporates fairness into game theory and economics: 1 People are willing to sacrifice to help those who are kind 2 People are willing to sacrifice to punish those who are unkind Andor, Frondel, Sommer Fairness and WTP for Impure Public Goods Vienna, 09-06-2017 2 / 14
Introduction Experimental Design Results Conclusion Fairness 1 Fairness perceptions are of major relevance for price setting (Kahneman et al. 1986) 2 An important determinant is whether other customers pay the same price Andor, Frondel, Sommer Fairness and WTP for Impure Public Goods Vienna, 09-06-2017 3 / 14
Introduction Experimental Design Results Conclusion Fairness Implications on the WTP for Public Goods 1 Ajzen et al. (2000) show that perceived fairness (extent to which the respondent benefits) increases WTP 2 The WTP for emission reductions and climate mitigation increase when costs are distributed among the responsible parties (Dietz and Atkinson 2010) Our Contribution We consider an impure public good and manipulate fairness by varying the payment rule Andor, Frondel, Sommer Fairness and WTP for Impure Public Goods Vienna, 09-06-2017 4 / 14
Introduction Experimental Design Results Conclusion Promotion of Renewable Energy Sources 1 Promotion via a system of technology-specific feed-in tariffs (FIT) that was introduced in 2000 2 It is financed via a levy that currently amounts to 6.88 ct/kWh 3 Customers had to bear 23 billion in 2016 4 But energy-intensive companies are eligbile for rebates Andor, Frondel, Sommer Fairness and WTP for Impure Public Goods Vienna, 09-06-2017 5 / 14
Introduction Experimental Design Results Conclusion Our approach 1 We conducted a between-subject discrete-choice experiment among 11,375 household heads 2 Participants were randomly split into three experimental groups 3 Single binary question on the willingness-to-pay for increasing the share of renewable energy sources 4 We vary the information on the exemptions and the payment rule Andor, Frondel, Sommer Fairness and WTP for Impure Public Goods Vienna, 09-06-2017 6 / 14
Introduction Experimental Design Results Conclusion Keep Condition About 4% of industrial companies are subject to exemptions of the EEG-levy and do not have to pay its full amount. These companies consume about 40% of industrial electricity. The exemptions are justified with the risk of losing international competitiveness compared to foreign companies. Keep Condition ”Given that the exemptions are kept, are you willing to pay an increase in the EEG-levy by x ct/kWh to achieve the goal of increasing the share of renewable energies to 35% by 2020?” x [ ∈ 1 , 2 , 4] Andor, Frondel, Sommer Fairness and WTP for Impure Public Goods Vienna, 09-06-2017 7 / 14
Introduction Experimental Design Results Conclusion Abolish Condition We change the payment rule About 4% of industrial companies are subject to exemptions of the EEG-levy and do not have to pay its full amount. These companies consume about 40% of industrial electricity. The exemptions are justified with the risk of losing international competitiveness compared to foreign companies. Abolish Condition ”Given that the exemptions are abolished, are you willing to pay an increase in the EEG-levy by x ct/kWh to achieve the goal of increasing the share of renewable energies to 35% by 2020?” Andor, Frondel, Sommer Fairness and WTP for Impure Public Goods Vienna, 09-06-2017 8 / 14
Introduction Experimental Design Results Conclusion Uninformed Condition Or we withdraw the information on the exemptions Uninformed Condition ”Are you willing to pay an increase in the EEG levy by x ct/kWh to achieve the goal of increasing the share of renewable energies to 35% by 2020?” Andor, Frondel, Sommer Fairness and WTP for Impure Public Goods Vienna, 09-06-2017 9 / 14
Introduction Experimental Design Results Conclusion Overview of Treatments and Hypotheses Uninformed Keep Abolish Condition Condition Condition Payment Rule Information Information + Payment Rule Hypothesis: Positive effect of Abolish Condition ⇒ Preference for equal contributions Andor, Frondel, Sommer Fairness and WTP for Impure Public Goods Vienna, 09-06-2017 10 / 14
Introduction Experimental Design Results Conclusion Descriptive Results Levy Uninformed Condition Keep Condition Abolish Condition Obs. Share Obs. Share Obs. Share 1 Cent / kWh 1,131 58.62% 1,098 38.16% 1,121 73.60% (9.87**) (18.00**) 2 Cent / kWh 1,090 49.36% 1,104 29.17% 1,048 67.56% (9.90**) (19.29**) 4 Cent / kWh 1,186 40.81% 1,061 22.53% 1,069 60.90% (9.44**) (19.48**) Note: t-statistics for equality in means between the Uninformed Condition as well as the Abolish Condition and the Keep Condition are in parentheses. ** denotes statistical significance at the 1% level. Andor, Frondel, Sommer Fairness and WTP for Impure Public Goods Vienna, 09-06-2017 11 / 14
Introduction Experimental Design Results Conclusion Regression Results Coeff. Std. Err. Abolish 0.393** (0.014) Uninformed 0.192** (0.014) 2 Cent -0.087** (0.015) 4 Cent -0.153** (0.015) Age -0.012** (0.003) Age × Age 0.000** (0.000) Female 0.057** (0.014) East Germany -0.055** (0.016) College degree 0.027* (0.014) Children -0.008 (0.015) Income 0.045** (0.013) Green attitudes 0.209** (0.019) Exemptions justified 0.069** (0.018) Share of industrial production 0.009 (0.055) Estimated consumption -0.023** (0.008) Constant 0.387** (0.132) No. of observations 5,923 Note: ** and * denote statistical significance at the 1 % and 5 %level, respectively. Dependent variable: 1 if respondent is willing to pay Andor, Frondel, Sommer Fairness and WTP for Impure Public Goods Vienna, 09-06-2017 12 / 14
Introduction Experimental Design Results Conclusion Heterogeneity Analysis: Justification of the Exemptions Coeff. Std. Err. Abolish -0.104 (0.310) Uninformed 0.313 (0.311) Exemptions justified 0.398** (0.027) Abolish × Exemptions justified -0.651** (0.039) Uninformed × Exemptions justified -0.410** (0.040) Constant 0.428* (0.216) No. of observations 5,748 Note: Standard errors are in parentheses. **,* denote statistical significance at the 1 % and 5 %level, respectively. Andor, Frondel, Sommer Fairness and WTP for Impure Public Goods Vienna, 09-06-2017 13 / 14
Introduction Experimental Design Results Conclusion Conclusion 1 WTP for (impure) public goods critically hinges on the payment rule 2 Evidence that respondents have a strong preference for equal contributions 3 Remarkable effect size: Changing to a regulation without exemptions has a larger effect than quartering the levy 4 Further evidence that fairness considerations can play a major role for the acceptance of policies Andor, Frondel, Sommer Fairness and WTP for Impure Public Goods Vienna, 09-06-2017 14 / 14
References Contact Information Stephan Sommer Hohenzollernstr. 1-3 D–45128 Essen sommer@rwi-essen.de www.rwi-essen.de Andor, Frondel, Sommer Fairness and WTP for Impure Public Goods Vienna, 09-06-2017 1 / 4
References References I Ajzen, Icek, Lori H Rosenthal, and Thomas C Brown (2000). “Effects of perceived fairness on willingness to pay”. In: Journal of Applied Social Psychology 30.12, pp. 2439–2450. Dietz, Simon and Giles Atkinson (2010). “The equity-efficiency trade-off in environmental policy: Evidence from stated preferences”. In: Land Economics 86.3, pp. 423–443. Kahneman, Daniel, Jack L Knetsch, and Richard H Thaler (1986). “Fairness and the assumptions of economics”. In: Journal of Business , S285–S300. Rabin, Matthew (1993). “Incorporating fairness into game theory and economics”. In: The American Economic Review , pp. 1281–1302. Andor, Frondel, Sommer Fairness and WTP for Impure Public Goods Vienna, 09-06-2017 2 / 4
References Consequential Script ”We would like to point out that the present study is part of a research project financed by the German Ministry of Education and Research (BMBF). The results of this study will be made available to politicians and serves as a basis for future decisions, especially with respect to determining the levy for the promotion of renewable energies (EEG-Umlage). To get to reasonable decisions, it is important that you state exactly the willingness-to-pay you are willing to pay at maximum” Andor, Frondel, Sommer Fairness and WTP for Impure Public Goods Vienna, 09-06-2017 3 / 4
References Introductory Text on Electricity Consumption ”The promotion of renewable energies has contributed to the deployment of 93 Gigawatt (GW) of renewable energies by 2014 in Germany and the production of 28% of green electricity. The German government aims at increasing the share of renewable energies to 35% by 2020” Andor, Frondel, Sommer Fairness and WTP for Impure Public Goods Vienna, 09-06-2017 4 / 4
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