CIFREM Doctoral Program in Economics and Management University of Trento, Italy Thesis Proposal Development (July 2006) Francesca Bortolami

Three different papers, with a common background (individual contribution in public good games): 1.Free riding and social norms 2.Effectiveness effect (definition and existence) 3.? Effectiveness Effect and Policy implications

1. Free riding and social norms Experimental study that compares the efficacy of two different applications of a same controlling rule (imposition vs self determination) First draft of the paper: Complete Literature review Pilot experiment results Future Developments (next September)  Computerized version of the game  Comparison with pilot experiment results

FREE RIDING and NORMS OF CONTROL: SELF-DETERMINATION AND IMPOSITION. AN EXPERIMENTAL COMPARISON By Francesca Bortolami and Luigi Mittone CEEL University of Trento

“PRIMARY” FREE RIDING WITH VOLUNTARY CONTRIBUTION MECHANISM GROUP SIZE PAYOFF STRUCTURE REPETITION COMMUNICATION LEARNING AND STRATEGY  free riding evidence GAME A - NORMS - CONTROL - SANCTIONING SYSTEM - ELEMENTS FROM OTHER DISCIPLINES - VALUE ORIENTATION  free riding repression EVOLUTION OF TOPICS CONCERNING FREE RIDING GAME B

EXPERIMENTAL DESIGN Group of Control (Gr.2) IMPOSITION GAME A with N SELF-DETERMINATION Experimental group (Gr.1) NORM N GAME A N with N GAME A with N GAME A GAME B

GAME A Voluntary contribution mechanism with repetition (5 rounds) and without communication Payoff function: л = y (1+ p) + Q (1+ r) /14 s.t y + q = 10 Л = payoff Y = private good P = private return rate Q = public good R = public return rate q = individual contribution to Q -No money back guarantee -Strong FR: q = 0 -Weak FR: 0 ≤ q ≤4

GAME B 5 PHASES subject to a specific time schedule (5 COMPONENTS OF THE NORM) 1. WHEN control takes place 2. NUMBER of persons under control 3. CHOICE between giving recompense to contribution or only sanctions 4. Type of REWARD 5. Type of SANCTION

For each component there are several options. Each option is associated to a cost, that affects directly the amount of the “public fund”. The cost is directly related to the frequency of audits. People discuss every component and vote anonymously the preferred option. The options that obtain the majority build up the final rule.

The final rule In a round extracted at the end of the game 5 persons will be controlled. Between them, if anyone had contributed to the Public Fund from 0 to 4 €, she/he does not receive anything, but if she/he had, she/he received a recompense equal to the 2% of the net public fund. The total cost for the norm’s implementation is the 3.5% of the public fund, Q.

Experimental results (pilot experiment) After Game B (game A with the norm N )

A. The Amount of Contribution:  How individual contributions to the public fund are distributed B. Total number of weak free riders (0 ≤ q ≤ 4) C. Total number of strong free riders (q= 0) D. Aggregation for intervals of contribution E. Trend of total contribution to the public fund

A.Distribution of q (Average Percentages)

B. Total number of weak free riders (0 ≤ q ≤ 4)

C. Total number of Strong Free Riders (q=0)

D. Aggregation for intervals of contribution

TREND of total contributions for public good Q

General Conclusions 1) Regardless the way of implementation, the modal value of contribution to the public fund is q=5 in each group 2) In the case of self-determination, the number of free riders (strong and total) is smaller than in the case of imposition 3) With self-determination there is an higher propensity to “cooperate”, whether in the group with imposition there is a propensity to opportunism. 4) With self -determination the total amount of Q is bigger than that obtained under imposition

Methodological Issues Importance of controlled experimental procedures/ environments  neutral social relationships among participants. Several Games (i.e Public Good Games, Trust Games,…) can involve social dimensions. In our experiment the social dimension in creating the norm (by mean of group dynamics) could be determinant for outcome explanation.

2. Effectiveness Effect How to define it:  Effectiveness effect has not an explicit definition in economic literature  To define it, some specific contributions in free riding literature (multidisciplines approach) may be useful

Frame: effectiveness effect finds its place in explaining dynamics for undercontribution in public good games. Three main quotations: 1.Systemic Free Riding (Sandler & Corner, 1986): undercontribution is explained as misunderstanding about how personal giving can shape collective supply 2. Group size effect (Olson, 1965; Sudgen, 1985): increasing the group size, individual contribution decreases 3. Expected Value Hypothesis (Offerman, 1997): actual personal contribution depends on how it is perceived on the aggregate level

1. Systemic free riding Literature distinguishes three different subclasses of free riding (McMillan, 1979): a)free riding of micro level: it is about the nature of goods, private and public ones, considered as normal to income effect. In this perspective, an increase of contribution from another individual reduces the contribution of the others, but in a manner not sufficient to compensate totally the initial increase b)informative free riding: it concerns the well known problem about the not correct revelation of preferences for public goods. Note that all these definitions are about the implication of pureness in public goods c)systemic free riding: it concerns the fact that each individual does not consider the effect that his personal contribution has on aggregate level of provision

But Systemic free riding does not explain what elements may affect the ratio Marginal (personal contribution) and Aggregate Level (total public good provided) and it does not give any explanation for the definition of personal misunderstanding  Effectiveness focuses on the elements that may affect this ratio and its misunderstanding

2. Group size effect Increasing group size dimensions, personal contribution decreases. As group size increases, individuals consider: a) their contribution as not important on the aggregate level and b) they consider as given the supply of the others.

But Group size approach does not explain why people tend to contribute more in small group size  Effectiveness explains why people contribute more in small groups (in terms of perception of personal contribution)

3. Expected Value Hypothesis Three relevant states of world determine individual contribution, according to how it is perceived, that is: a) futile: public good will be not provided whatever the individual choice, i.e fewer than s-1 of the other subjects contribute (where s means the threshold) b) critical: exactly s-1 contribute c) redundant: the public good will be provided whatever the individual choice, i.e more than s-1 contribute According to this theory, people associate subjective probability to the personal contribution, that is they have different estimation about P( s-1). The Expected Values Hypothesis so becomes: people will contribute if and only if they estimate the probability that their personal contribution will be critical or sufficiently high

But Expected Value Hypothesis does not explain what affects the perception of critical contribution  Effectiveness considers possible different elements that affect personal contribution perception

First definition of Effectiveness Effect The effectiveness effect is the result of specific elements that recall to individual’s mind how personal contribution is important to provide a public good. Effectiveness effect may be activated when persons perceive their contribution as critical in small group dimension Effectiveness is strictly linked with instruments that make clear perception of criticity, as: –Decomposition of complexity –Procedural Choice –Closeness effect

Next months perspective Research of specific variables that define properly the effectiveness effect (group size, perception of critical contribution and so on) Definition of possible aspect that may affect effectiveness effect (how perception can be modified; decomposition of complexity and so on) First experimental design to test these initial hyphoteses.

Payoff Tables

Payoff

rate of return for Q