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UCSD ECON 264 - Private Costs and Public Benefits

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Journal of Public Economics 83 (2002) 255–276www.elsevier.com/locate/econbasePrivate costs and public benefits: unraveling the effectsof altruism and noisy behavioraab,*Jacob K. Goeree , Charles A. Holt , Susan K. LauryaDepartment of Economics,University of Virginia,Charlottesville,VA22903,USAbDepartment of Economics,Andrew Young School of Policy Studies,Georgia State University,Atlanta,GA30303-3083,USAReceived 26 April 2000; received in revised form 10 September 2000; accepted 3 November 2000AbstractAn increase in the common marginal value of a public good has two effects: it increasesthe benefit of a contribution to others, and it reduces the net cost of making a contribution.These two effects can be decomposed by letting a contribution have an ‘internal’ return foroneself that differs from the ‘external’ return to someone else. We use this framework in aseries of one-shot public goods games in which subjects make choices in ten treatmentswith no feedback. Contributions are generally increasing in the external return and groupsize, which suggests that altruism in this context is not simply of the ‘warm glow’ variety,i.e. giving only for the sake of giving. Contributions are also increasing in the internalreturn, indicating that decisions are sensitive to the costs of helping others. We specify alogit equilibrium model in which individuals are motivated by own and others’ earnings,and in which choice is stochastic. Maximum likelihood estimates of (representative–agent)altruism and logit parameters are significant and of reasonable magnitudes, and the resultingtwo-parameter model tracks the pattern of contributions across the ten treatments. A richermodel reveals some differences in individual altruism coefficients, with more dispersionamong male subjects.  2002 Elsevier Science B.V. All rights reserved.Keywords:Alruism; Public good; Contribution model; Experiment*Corresponding author. Tel.: 11-404-651-2618; fax: 11-404-651-0425.E-mail address:[email protected] (S.K. Laury).0047-2727/02/$ – see front matter  2002 Elsevier Science B.V. All rights reserved.PII: S0047-2727(00)00160-2256 J.K.Goeree et al./ Journal of Public Economics83 (2002) 255–2761. IntroductionAs Ledyard (1995) concludes, there is still no consensus on what is driving thediverse behavioral patterns in public goods experiments. Some plausible factorsinclude altruistic preferences for others’ earnings, reciprocal responses to others’contributions, and some degree of confusion and error. The wealth of laboratorydata has stimulated a number of theoretical papers that consider preference-based,1error-based, and learning-based explanations. Most subsequent laboratory experi-ments have used clever designs to eliminate or control for particular factors inorder to isolate the effects of others.Because many issues remain unresolved, it is useful to consider an alternativeapproach that is more closely tied to economic theory and standard econometrics.In particular, several economists have specified more general models of behavior2motivated by altruism and/or relative earnings. The experiments reported here useboth experimental design/control and theory-based econometric techniques toinvestigate contribution behavior in a series of one-shot public goods games. Weare able to obtain precise distinctions by independently varying the net cost ofmaking a contribution and the external benefit to others in the group. We thenspecify and estimate an equilibrium model that incorporates preferences thatdepend on others’ earnings and noisy decision making.Before describing our design, it is useful to review the structure of a standardlinear public goods game, in which subjects begin with an endowment of ‘tokens’that can either be kept or contributed. Each token kept yields a constant monetaryreturn for the subject, and each token that is contributed also yields a constantreturn, both for that person and for all others in the group. The sum of all groupmembers’ returns from the contribution typically exceeds the individual’s returnfrom keeping the token, so group earnings are maximized by full contribution. Thenet monetary loss from making a contribution is the difference between the valueof a token that is kept and what the subject earns from a token contributed to thepublic good. A positive net loss ensures that the Nash equilibrium is to contributenothing, at least in a one-shot game with no altruistic feelings about others’payoffs.In the absence of altruism, an individual may make some contributions if the netloss from contributing is relatively small and there is some ‘noise’ in thedecision-making process. Whether these contributions are interpreted as rationalresponses to unobserved preference shocks or as mistakes, the effects of noiseshould be greater when the net cost of a contribution is small.When there is altruism, the net loss from making a contribution should becompared with the benefit that is enjoyed by others in the group. The presence of1See Holt and Laury (2000) for a recent survey of theoretical explanations of behavior in publicgoods games.2See, for example, Andreoni and Miller (2000); Palfrey and Prisbrey (1997); Bolton and Ockenfels(2000); and Fehr and Schmidt (1999).J.K.Goeree et al./ Journal of Public Economics83 (2002) 255–276257at least some altruism is suggested by the most consistent treatment effect in linearpublic goods games: an increase in the common marginal value of the public goodwill raise contributions. This treatment change confounds two separate factors,however. It increases the marginal value of the public good, thereby lowering the3net cost of contributing and raising the benefit to others at the same time.Following Carter et al. (1992) we allow a costly contribution to have twodistinct effects, an ‘internal return’ to oneself and a possibly different ‘externalreturn’ to others in the group. In one treatment, for example, a token that is worth5 cents if kept, returns 4 cents to that person if contributed, but provides anexternal return of only 2 cents for each other person in the group. Thus the net costto oneself is 1 cent, and the act of contributing increases each other person’searnings by 2 cents. A modification of the internal return changes the net cost ofcontributing, without altering the benefits to others. Conversely, a change in theexternal return alters others’ benefits without affecting the cost of contribution.Carter et al.


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UCSD ECON 264 - Private Costs and Public Benefits

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