Experiments on credence goods - uni-muenchen.de · Radiohead, In Rainbows. Fehlte der Leuchtturm? (c) M. Kocher and M. Sutter 4. Motivation III - Applications are numerous. - Among

Topic 2a – Cooperation I

Martin KocherUniversity of Munich

Experimentelle Wirtschaftsforschung

(c) M. Kocher and M. Sutter 2

Motivation I

- Cooperation is a ubiquitous phenomenon that has not only been studied in humans but also in many animals.

- It is, of course, especially interesting to study cooperation in contexts in which individual rationality (under selfishness assumptions) would dictate defection but collective rationality (efficiency) would require cooperation.

- Such situations have been coined social dilemmas (in sociology and psychology). In economics cooperation is usually analyzed in prisoner’s dilemma games (binary) or in the context of the provision of public goods (public goods games).


Motivation II

Radiohead, In Rainbows Fehlte der Leuchtturm?


Motivation III- Applications are numerous.- Among the most important are: effort in work teams,

provision of tangible or intangible public goods, the use of natural resources (the tragedy of the commons), contributions to charities, tax honesty, and so on.

- Research on cooperation became clearly interdisciplinary lately, with many biologists, mathematicians, sociologists, psychologists and political scientists working (also jointly) to answer similar research questions.


Preview of topic 2a

There is an early stage of research in economics on the prisoner’s dilemma that we are not going to cover here.

Earlier literature

+ Isaac, McCue and Plott (1985)

+ Isaac and Walker (1988)

Punishment institution

+ Fehr and Gächter (2000)

+ Masclet et al. (2003)

+ Rege and Telle (2004)


- Why do people cooperate when it is individually optimal to defect?

- What explains the dynamics of cooperation?

- Which kind of institutions foster cooperation?

The basic questions


- In the early days of experiments in sociology, psychology and economics the prisoner’s dilemma game was used to study cooperation.

- Now, most studies use a simultaneous linear public goods game (the voluntary contribution mechanism = VCM).

- Bear in mind other mechanisms such as step-level public goods (provision point mechanisms), non-linear public goods, dynamic public goods, sequential contributions etc.

Workhorses


- Write down contribution level each period.

- Constant marginal costs of provision shared among subjects.

- Infinite horizon (!), payoff functions not common knowledge.

- Some sessions with common knowledge and some sessions with communication between players.

Isaac et al. (1985) - procedure


Isaac et al. (1985) - setup








Isaac et al. (1985) - results






Isaac et al. (1985) - conclusions- By the fifth period the Lindahl equilibrium can be

rejected in favor of the public goods model as can any other model which predicts that the level of public goods provision will be ‘substantially above’ zero.

- Funding levels are near zero but still above zero.- With repetition the level of public goods provision falls.- The first three conclusions hold if system efficiency is

used as a measure of the level of public goods provision in place of the number of units.

- Very few individuals contributed nothing in the first period, but the proportion of individuals who contributed small amounts increases with repetition.


Isaac et al. (1985) - conclusions

- Announcing the Lindahl equilibrium quantities and prices causes an increase in the amount of the public good supplied but the higher level does not seem to be stable.

- Communication increases the level of contribution (and efficiency). The increase is small but it appears to be stable.


- They study group size effects and the effects of the MPCR (= marginal per capita return) in the VCM.

- Computerized (!)- Now standard setup: individual optimum = 0

contribution; social optimum = contributing the whole endowment.

- With Zi as individual endowment and mi as the individual contribution.

Isaac and Walker (1988)

)()/1(1

1∑−

=

++−=n

jjiiii mmGnmZU


Important distinction:- Altering the MPCR and holding n constant- Altering n but adjusting the G(.) functions so that MPCR

remains constant- The combination effect in which altering n also alters

MPCR.

- Finite game with 10 periods, different endowments.- Within-subject alteration of MPCR (0.3, 0.75) controlling

for order effects.- 4-person and 10-person experiments.

Isaac and Walker (1988)


Isaac and Walker (1988) - design


Isaac and Walker (1988) - results

Less than 1/3 of social optimum.






- Strong effect of MPCR.- No effect of group size as long as MPCR is constant.- Mancur Olson, “The logic of collective action” –

consistent? (if n increases: crowding)- Marwell and Ames (1979): alteration of reported group

size in a provision point mechanism; 4 vs. 80 (under deception) – not statistically significant difference.

Isaac and Walker (1988) - conclusions


Summary public goods experiments I

Why do people contribute to public goods when it is individually rational not to?

- Altruism, warm glow- Fairness- Conditional cooperation, reciprocity- Confusion, mistakes

Palfrey and Prisbrey (1997, AER) and Kurzban and Houser (2002, AER) versus Fischbacher, Fehr and Gächter (2001, Econ Lett) as well as some discussion papers.


Summary public goods experiments II

What influences contributions in linear public goods games?

Positive: marginal per capita return, communication, reward, punishment (monetary and non-monetary), positive framing, partner design, thresholds, endogenous association, leadership

Negative: heterogeneous endowments, experienced subjects, beliefs about others solicited, repetition, economic training

No significant effect: number of interaction periods, group size, gender, culture

And probably many more…


Summary public goods experiments III

The discussion about why people contribute and about some of the effects on contribution levels are not finally settled in economics.

The linear VCM is only one possible setting and probably not the most realistic.

Two overview articles:Ledyard, J. O. (1995). Public goods. A survey of experimental

research. In: Kagel and Roth (eds.). Handbook of Experimental Economics. Princeton University Press

Zelmer, J. (2003). Linear public goods experiments: A meta-analysis. Experimental Economics 6: 299-310.


Punishment

- Informal versus formal sanctions.- How are sanctions usually implemented in PGGs?- One institution that potentially fosters cooperation.- Earlier assessments: Ostrom, Walker and Gardner

(1992) and Yamagishi (1988).- Fehr and Gächter (2000) introduce the concept to

economics.


Fehr and Gächter (2000) - main research questions

- Will free riders be punished when punishment is costly and will punishment intensity depend on the difference in contributions?

- Can punishment increase the contributions of potential free riders?

- What are the effects of punishment on efficiency?


Fehr and Gächter (2000) - design

- 2x2 design: punishment/no punishment and partner/stranger

- 4-person groups- Finite horizon (10 periods)- Within-subject design (punish vs. no punish)


Fehr and Gächter (2000) - design

- Without punishment:

- With punishment:

- y = 20; a = 0.4- Theoretic solutions (under different assumptions)?


Fehr and Gächter (2000) – results strangers






Fehr and Gächter (2000) – results partners






Fehr and Gächter (2000) – results reaction functions


Fehr and Gächter (2000) – results reaction functions


Fehr and Gächter (2000) – results efficiency


Fehr and Gächter (2000) – summary and interpretation

- Punishment can sustain cooperation.- What drives punishment? Emotions, social

preferences, reciprocity,…?- Unclear efficiency effects.- Fehr and Gächter (2000) created “the” paradigm to

study punishment in economics.


Masclet et al. (2003) – monetary and non-monetary punishment

- Direct Punishment Hypothesis (DPH): The opportunity for agents to reduce the monetary payoff of others after observing their decisions increases contribution levels. The authors however formulate another hypothesis, namely:

- Indirect Punishment Hypothesis (IPH): The opportunity for agents to express disapproval of others’ decisions increases contribution levels.

- Monetary Punishment Partner treatment (MP)- Nonmonetary Punishment Partner treatment (NP)- Nonmonetary Punishment Stranger treatment (NS)



- Contributions NP > no sanction treatment →support for the IPH.

- Contributions MP > NP → support for the DPH since the only difference between MP and NP is the monetary dimension of the sanction.

- Higher contributions under Partner than under Stranger matching would suggest that the effectiveness of informal sanctions depends, at least in part, on repeated interaction.



- 11 sessions of 30 periods, divided into three segments of 10 periods.

- In periods 1-10 an 21-30 there was no punishment available.

- The experiment has a standard design in which the dominant strategy is to contribute nothing both in finitely repeated games as well as in one-shot games.

- Location: US and France



- MP is identical to the Fehr and Gächter-experiment.- Same payoff functions and cost structure.- The rest of the treatments are identical except that the

assigning of points involve no costs. So in the NP treatments a subjects could in stage 2 express her feelings by assigning points between 0 and 10 to another subject in her group, where ten is the highest number of disapproval a subject could choose.











- The Direct and Indirect Punishment Hypotheses are both supported. Monetary and non-monetary sanctions initially increase contributions by a similar amount. Over time, however, monetary sanctions lead to higher contributions than non-monetary sanctions. After the opportunity to impose sanctions is lifted, contributions fall to similar levels in both treatments.

- When non-monetary sanctions are available, contribution levels are greater under Partner than under Stranger matching.

- Both types of sanctions increase average earnings.








Rege and Telle (2004) – social approval

- Social norm: a rule of behavior that is enforced by social sanctions.

- Can a norm enforce cooperation?- Internalized social norm: guilt.- How do internalized norms such as social approval and

framing can affect cooperation among strangers in a public good game?

- Assumption: People have preferences for social approval.



- 10 subjects in a group- Box with money (10 times 150 kroner)- Each subject i has to decide how much money to take

from this box (i.e., gi ). - Payoff function:

This payoff structure does not differ from the one normally used in experimental research on public goods.

- One-shot.

∑ =−+=j

jii jgg 10,....,1 ,)150(1012π



The following main procedure is held in all treatments: one person at a time is asked to come up to the box. She then receives two envelopes, a ‘group envelope’ and a ‘personal envelope’. In addition, she receives 150 kroner from the box. She has to bring the money and the envelopes behind a screen where nobody, including the experimenters, can see her. Behind this screen she has to divide the 150 kroner between the two envelopes, and seal them. To secure absolute discretion, she then has to put both envelopes into one large envelope, which she brings back to her seat.





No-approval treatment: One person at a time has to return her sealed group envelope to the box. An experimenter mixes the 10 group envelopes. Then, she randomly draws one envelope at a time from the box, counts the amount of money in the envelope, and writes the sum on the blackboard. This is done in sight of all of the participants. This procedure ensures full anonymity with regard to the contribution of each participant, thus making social approval and disapproval impossible.



Approval-treatment: One person at a time has to come up to the box with her sealed group envelope. In sight of all of the participants she then opens her envelope, counts the amount of money in the envelope, writes the sum on the blackboard, and puts the money into the box. This procedure ensures revelation of each participant’s choice and identity, thus making indirect social approval and disapproval possible.



Associative treatment: The public good game is presented in language that suggests associations to social and internalised norms for cooperation. The 10 subjects are referred to as a ‘community’. The box is referred to as ‘the community box’. The money in the box is said to belong to the community. The group envelope is marked ‘the community’, whereas the personal envelope is marked ‘mine’. Finally, the strategy choice is presented as follows: each person can choose either to be a free-rider by taking money from the community box, or to be a co-operator by not taking money from the community box.



Non-associative-treatment: Instructions are written in a language that is not meant to give associations to social norms for cooperation. The 10 subjects are referred to as ‘participants in the experiment’. The box is simply referred to as ‘the box’. The money in the box is said to belong to the participants in the experiment. The group envelope is marked ‘back in the box’, whereas the personal envelope is marked ‘mine’. Finally, the strategy choice is presented as follows: each person can choose either to take money from the box, or not to take money from the box.







- The data support the hypothesis that introduction of indirect social approval incentives increases contributions. But the support for the second hypothesis is weak.

- The experimental results in the paper suggest identity- revelation as an important policy tool for increasing contributions to public goods.

- An important task for future research is to investigate the robustness of the identity revealing policy.

Experiments on credence goods - uni-muenchen.de · Radiohead, In Rainbows. Fehlte der Leuchtturm? (c) M. Kocher and M. Sutter 4. Motivation III - Applications are numerous. - Among

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