Fairness and the Willingness to Pay for Impure Public Goods Mark - - PowerPoint PPT Presentation

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

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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

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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

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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

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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

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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]

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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?”

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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?”

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Introduction Experimental Design Results Conclusion

Overview of Treatments and Hypotheses

Uninformed Condition Keep Condition Abolish Condition Information Payment Rule Information + Payment Rule Hypothesis: Positive effect of Abolish Condition ⇒ Preference for equal contributions

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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

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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

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References

Contact Information

Stephan Sommer

• Hohenzollernstr. 1-3

D–45128 Essen sommer@rwi-essen.de www.rwi-essen.de

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References

References I

Ajzen, Icek, Lori H Rosenthal, and Thomas C Brown (2000). “Effects of perceived fairness on willingness to pay”. In: Journal

• f 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.

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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”

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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”

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