1 University of Auckland Winter Week Lectures Second Lecture 3 July 2007 Associate Professor Ananish...

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University of Auckland Winter Week Lectures

Second Lecture3 July 2007

Associate Professor Ananish Chaudhuri

Department of Economics University of Auckland

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Back to the example of building a public park• A public park is a public good

• non-rival in consumption • benefits are non-excludable.

• A good is non-rival in consumption when A’s consumption of it does not interfere with B’s consumption of it. The benefits of the good are collective—they accrue to everyone.

• A good is non-excludable if, once produced, no one can be excluded from enjoying its benefits. The good cannot be withheld from those that did not pay for it.

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Examples of Public Goods

• Fire Service• Police• National Defense• Highways• Public Parks • Environment• Hospitals• Public Libraries

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Problems of Cooperation

• Cooperative hunting and warfare (important during human evolution)

• Exploitation of common pool resources• Clean environment• Teamwork in organizations• Collective action (demonstrations,

fighting a dictatorship)• Voting

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Basic economic problem• Cooperative behavior has a

positive externality.• Hence, the benefit to society

exceeds the benefit to the private person providing it.

• Therefore private individuals are willing to incur the cost of providing this if and only if enough others do so.

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A Public Goods Game

• Group of 4 players• Each of them has $5• Each can contribute to either a

“private” account or a “public” account

• Money put in the private account remains unchanged

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A Public Goods Game

• Money contributed to the public account

• doubled by the experimenter• redistributed equally among members

of the group

• The question is – how much should each person contribute?

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A Public Goods Game

• Total amount in the public account =

• Doubled amount =

• Divided by four each person gets back =

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A Public Goods Game

• Analogous to a Prisoner’s Dilemma• For maximum social benefit, each

player should put all $5 into the public account

• A total of $20 which gets doubled to $40

• Redistributed equally gets $10 for each player

• 100% return on investment

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A Public Goods Game• The self-interested strategy is to free-

ride (i.e. not to put any money in the public account)

• Suppose I contribute $1, but no one else does

• $1 gets doubled to $2• Redistributed equally gets $0.50 for

each group member• I lose $0.50 while other players (who

have not contributed anything) gain $0.50

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A Public Goods Game

• Self-interest suggests that no player has an incentive to contribute

• Even though social benefit is maximized when everyone does so

• This game has been used extensively to look at issues of cooperation and selfishness in such social dilemmas

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A few points to bear in mind

• Simultaneous decisions• All players make contribution

decisions at the same time

• One-shot game

• Finitely-repeated game

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One shot game

• Players play the game once and only once

• We would expect self-interested players to free-ride

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Finitely repeated game

• Players know that they will play the game a certain number of times – say 5 times. Players know with certainty when the game will end.

• We would still expect self-interested players to free ride on the basis of backward induction

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Backward Induction

• You already have an idea of what backward induction is

• You start with what will happen at the end and work your way backwards

• Where I want to end up often dictates where and how I should start

Finitely repeated game - what would happen in the fifth and last play of the game?

• All self-interested players would free-ride

• If players anticipate that then they should also free-ride on the fourth play of the game

• If players anticipate that then they should also free-ride on the third play of the game

• And so on

• So they should free ride from the very start of the game

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A few points to bear in mind• Anonymity

• Participants never learn the decisions made by other participants

• Single-blind protocol• experimenter can see decisions made by

participants

• Double-blind protocol• Even experimenter cannot see decisions made by

each individual

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10%

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50%

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60%

70%

1 2 3 4 5 6 7 8 9 10

Pattern of contributions when the game is played ten times with a known end-point

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Why do people do what they do?

• Not everyone contributes in the middle to start with

• Some people contribute everything at the beginning while others contribute less

• Some contribute nothing from the very beginning

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Why do people do what they do?• A number of puzzles here• Why do people cooperate at the

beginning and free-ride later?• If they are going to free-ride why

do they not start to do so immediately?

• Why do contributions start around 40% - 60%?

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Why do people do what they do?• We have already argued that free-riding

is the self-interested course of action

• So maybe that is easier to understand

• But how about the ones who contribute a lot?• Are they being purely altruistic?• That is – do they contribute because they

care about the welfare of others?

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Why do people cooperate?

• It turns out that the motivation behind cooperation is far more nuanced than pure (unconditional) altruism

• People are conditional cooperators

• Beliefs regarding the actions of fellow group members play a crucial role

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Conditional Cooperation- Fehr, Fischbacher and Gächter

• Players are asked to choose • An unconditional contribution• A conditional contribution, i.e., for

every given average contribution of the other members they decide how much to contribute.

• A selfish player is predicted to always choose a conditional contribution of zero.

25Chaudhuri and Paichayontvijit (2006), n = 88

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Average Contribution of Other Group Members

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ConditionalCooperators(61.8%)

26Chaudhuri and Paichayontvijit (2006)

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Ow

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27Source: Chaudhuri and Paichayontvijit (2006)

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Free Riders (16.2%)

Weak Cooperators(7.4%)



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Ow

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Free Riders (16.2%)

Weak Cooperators(7.4%)


Hump ShapedContribution (5.9%)


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Free Riders(16.2%)

WeakCooperators(7.4%)


Hump ShapedContribution(5.9%)

Overall Mean

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Results

• Unconditional cooperation is virtually absent.

• Heterogeneity:• Roughly half (or more than half) of

the subjects are conditional cooperators.

• Only a minority are free-riders (selfish).

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Role of Beliefs

• Participants have very different beliefs about the contributions to be made by group members

• And they choose their contribution levels based on those beliefs

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BL=0 (16%)

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BL=0 (16%)

What if participants could not see what others are doing?

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BL=0 (16%) BL=1 (68%)


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BL=0 (16%) BL=1 (68%) BL=2 (16%)


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Role of beliefs

• Those with optimistic beliefs might start out with high contributions

• But over time as they see the average contributions fall they start to reduce their contribution

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Questions?

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