Can context effects mitigate behavior that causes negative externalities? An experimental investigation

Date
2010
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University of Delaware
Abstract
Self-interested behavior can be detrimental to the public good when an individual or firm making a decision is not fully responsible for the cost of that decision to society, therefore acting as a free-rider. This disconnection between decisions and their costs to society underlies many modern environmental, public health, and social problems. Examples include air and water pollution, climate change, and overuse of common pool resources. Under the framework of traditional economics, governments can “internalize” relevant costs. However, such actions may not eliminate or reduce the problems due to lack of necessary information. Behavioral economics, however, can offer a new perspective in tackling such public ills. Previous laboratory and field studies have shown that people may not behave as predicted by traditional economic theories. In this study, a “public bad” game that incorporated an externality cost was designed to examine how contextual factors affect people ‘s behavior in a laboratory setting. Six treatments were employed in experiments to investigate the effect of cheap talk, status quo, and voting. Each treatment was composed of six groups of seven individuals. Undergraduate students with some background in economics at University of Delaware were recruited to participate in the experiments. Thus, a total of 252 subjects were used. Relying on Andreoni (1995), I adopted negative framing to examine the framing effect. Results from the experiment were analyzed at group and individual levels and graphs depicting the round-by-round data enable one to compare all treatments. A Tobit model was used at the group level to study treatment effects on contributions to a group account. A Probit model was used at the individual level to study treatment effects on the probability of an individual making a full or zero contribution. Panel data techniques were employed in both models to take heterogeneity into account. The analysis showed that cheap talk can increase the contribution rate significantly, a result that is consistent with former studies. Status quo, however, had no significant effect on contributions when other contextual factors were excluded from the experiment. When other contextual factors were included, the effect of status quo varied from previous studies involving public-good games. Status quo itself could not always increase the efficiency level. Consequently, the results of laboratory games can provide useful information for policy-makers. Communication can reduce or even overcome behaviors which cause negative externalities. Since people are more likely to contribute under positive framing than under negative framing, policy-makers who frame externality problems in terms of public good (i.e. positive externality) rather than public detriment (i.e. negative externality) should be more successful in finding practical solutions and engaging public support.
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