Environmental Economics Lecture 7 Voluntary Contributions: - - PowerPoint PPT Presentation

ECON 4910, L7. Slide 1/ 19

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 2/ 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 3/ 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 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.”

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 5/ 19

Behavioral evidence for neoclassical economic theory

◮ Around 20%-40% of respondents choose to “cooperate” in a

• ne-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

• ne-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

• ne-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

• ne-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

• ne-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

• ne-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 6/ 19

Identifying and testing leverage points for policy

Dynamics and Punishment (Fehr and G¨ achter, 2000):

ECON 4910, L7. Slide 7/ 19

Identifying and testing leverage points for policy

Dynamics and Punishment (Fehr and G¨ achter, 2000):

ECON 4910, L7. Slide 8/ 19

Behavioral evidence for neoclassical economic theory

◮ Around 20%-40% of respondents choose to “cooperate” in a

• ne-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 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

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 10/ 19

Homo oeconomicus

◮ Model: max u(xi) + v(E) s.t. xi + gi = wi and

E = E 0 +

i gi ◮ FOC for interior solution: u′(xi) = v′(E) ◮ Positive contribution only if v′(E −i) > u′(wi) where E −i is

env.quality if gi = 0, treated as exogenous

◮ Implications: Dollar-for-dollar crowding out when

v′(E −i) ≤ u′(wi). Govt has no impact on private provision

• therwise. As n grows, only the richest contribute.

ECON 4910, L7. Slide 11/ 19

Pure altruism

◮ Difficult to model. Simple example: max u(xi) + v(E) + k(E)

s.t. xi + gi = wi and E = E 0 +

i gi ◮ Almost no effect on aggregate giving ◮ Dollar for dollar crowding out

ECON 4910, L7. Slide 12/ 19

Impure altruism / “warm glow of giving”

◮ Simple model example: max u(xi) + v(E) + k(gi) s.t.

xi + gi = wi and E = E 0 +

i gi ◮ Insertion leads to max u(wi − gi) + v(E −i + gi) + k(gi) ◮ FOC for interior solution: v′(E) + k′(gi) = u′(wi − gi) ◮ Positive contribution if v′(E −i) + k′(gi) > u′(xi) also if E −i

very high

◮ No perfect crowding out: Theoretically towards zero in very

large samples, incomplete in small samples

◮ Much used model, but what exactly is this private benefit?

ECON 4910, L7. Slide 13/ 19

Social norms, reciprocity, commitment etc

◮ Many different models, going away from central neoclassical

assumptions

◮ Doing sth at a personal cost b/c it is “morally right” ◮ Doing sth b/c it conforms to what others do ◮ Reciprocity: Preference for “tit for tat” ◮ Marginal benefit of own giving increasing in others giving.

Possibility for multiple equilibria and re-enforcing effects of

• govt. action

◮ Different roles (consumer / citizen). May lead to

non-transitive preferences. Can explain over-compensation

ECON 4910, L7. Slide 14/ 19

Identifying and testing leverage points for policy

Experiments inform environmental policy by highlighting the importance of communication:

◮ Enabling coordination ◮ Create an understanding for the optimal group outcome

ECON 4910, L7. Slide 15/ 19

Identifying and testing leverage points for policy

Example for coordination (Barrett and Dannenberg, 2014):

5 10 15 20 5 10 15 20 150 140/160 135/165 100/200 145/155 5 10 15 20 5 10 Individual contributions Individual contributions Individual contributions Individual pledges 5 10 15 20 Individual pledges 5 10 15 20 Individual pledges Individual pledges 5 10 15 20 Individual pledges 15 20 5 10 Individual contributions Individual contributions 15 20 5 10 15 20 5 10 15 20

ECON 4910, L7. Slide 16/ 19

Identifying and testing leverage points for policy

Experiments inform environmental policy by highlighting the importance of communication:

◮ Enabling coordination ◮ Create an understanding for the optimal group outcome ◮ “Soft” punishment

ECON 4910, L7. Slide 16/ 19

Identifying and testing leverage points for policy

Experiments inform environmental policy by highlighting the importance of communication:

◮ Enabling coordination ◮ Create an understanding for the optimal group outcome ◮ “Soft” punishment

But public good experiments may be overly optimistic. Many actual resource use situation characterized by strategic substitutes. This may resuscitate Friedman’s instrumentalism

ECON 4910, L7. Slide 17/ 19

Informing Cost-Benefit analysis and market approaches

Will agent’s reveal their true value?

ECON 4910, L7. Slide 17/ 19

Informing Cost-Benefit analysis and market approaches

Experimental evidence for the market’s efficiency (Smith 1962):

ECON 4910, L7. Slide 17/ 19

Informing Cost-Benefit analysis and market approaches

Will agent’s reveal their true value?

◮ Cheap talk may reduce hypothetical bias ◮ Repeated trading experience reduces WTP/WTA disparity

ECON 4910, L7. Slide 17/ 19

Informing Cost-Benefit analysis and market approaches

Will agent’s reveal their true value?

◮ Cheap talk may reduce hypothetical bias ◮ Repeated trading experience reduces WTP/WTA disparity

Experiments as a test-bed for nudges:

ECON 4910, L7. Slide 17/ 19

Informing Cost-Benefit analysis and market approaches

Will agent’s reveal their true value?

◮ Cheap talk may reduce hypothetical bias ◮ Repeated trading experience reduces WTP/WTA disparity

Experiments as a test-bed for nudges:

◮ OPOWER, based on field experiment, reduce energy

consumption by emoticons and comparison with peers

ECON 4910, L7. Slide 17/ 19

Informing Cost-Benefit analysis and market approaches

Will agent’s reveal their true value?

◮ Cheap talk may reduce hypothetical bias ◮ Repeated trading experience reduces WTP/WTA disparity

Experiments as a test-bed for nudges:

◮ OPOWER, based on field experiment, reduce energy

consumption by emoticons and comparison with peers

◮ Effect size amounts to 10.4 hours of 60W light bulb (sample

• f 600.000 household)

ECON 4910, L7. Slide 17/ 19

Informing Cost-Benefit analysis and market approaches

Will agent’s reveal their true value?

◮ Cheap talk may reduce hypothetical bias ◮ Repeated trading experience reduces WTP/WTA disparity

Experiments as a test-bed for nudges:

◮ OPOWER, based on field experiment, reduce energy

consumption by emoticons and comparison with peers

◮ Effect size amounts to 10.4 hours of 60W light bulb (sample

• f 600.000 household)

◮ Effect size depend on user characteristics: Republicans

increased energy use.

ECON 4910, L7. Slide 17/ 19

Informing Cost-Benefit analysis and market approaches

Will agent’s reveal their true value?

◮ Cheap talk may reduce hypothetical bias ◮ Repeated trading experience reduces WTP/WTA disparity

Experiments as a test-bed for nudges:

◮ OPOWER, based on field experiment, reduce energy

consumption by emoticons and comparison with peers

◮ Effect size amounts to 10.4 hours of 60W light bulb (sample

• f 600.000 household)

◮ Effect size depend on user characteristics: Republicans

increased energy use.

◮ All sorts of dynamic effects (cf “earth hour”)

ECON 4910, L7. Slide 18/ 19

Review 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 19/ 19

Preview rest of class (Michael Hoel)

Mar 19 L8 Environmental R&D (MH) Mar 26 L9 Stock pollution problems (MH) Apr 2

• /-

No lecture Apr 9 L10 Climate policy: taxes and quotas (MH) Apr 16 L11 Climate policy: Subsidies and renewable portfolio standards (MH) Apr 23 L12 International Environmental Agreements (MH) Apr 30 L13 Supply-side climate policy (MH)

Exam is on May 26, 14:30-17:30 (3 hours) at Gymsal 3