University of Delaware Can Context Effects Mitigate the Free-Riding Behavior that Causes Negative Externalities? : An Experimental Investigation Jubo Yan Kent Messer University of Delaware Jordan Suter Oberlin College

INTRODUCTION Externality - environmental, public health, and other social problems Not from the direct actions of malign individuals Arise indirectly from benign people’s self- interested behavior

INTRODUCTION Standard Economic Theory -- a bleak assessment of outcome given voluntary behaviors Behavioral Economics -- the context may be an effective tool to reduce the pervasiveness of negative externalities.

LITERATURE (Andreoni 1995) Contributing to a public good Incurring a negative externality on the other group-members MPCR=1/2=0.5

LITERATURE (Andreoni 1995)

LITERATURE (Messer et al. 2007) Public good problem can be improved or even overcome in a laboratory setting Introducing a variety of real world contexts to the decision setting Voting: A confidential majority vote between two options (Group Account & Private Lottery) Cheap Talk: An open discussion with group members up to ten minutes Status Quo: Money is initially allocated in the Group Account

LITERATURE (Messer et al. 2007) Individual Account: Return Rate 1 Group Account: Return Rate 1.5 MPCR=1.5/7=0.214

No Status Quo without Voting and Cheap Talk

Status Quo without Voting and Cheap Talk

No Status Quo with Voting and Cheap Talk

Status Quo with Voting and Cheap Talk

EXPERIMENT DESIGN Account A: No externality; Return rate 1.5 Group size: 7 Number of rounds: 20 (predetermined but not announced) Account A: No externality; Return rate 1.5 Account B: Externality; Return rate 2.5 with Externality

EXPERIMENT DESIGN MPCR=1.5/7=0.214 Status Quo: Money initially allocated in Account A Subjects are given one dollar at the beginning of each round (in Account A or in Account B) MPCR=1.5/7=0.214

EXPECTATION Cheap Talk and Voting together can eliminate the negative externality problem on some level The Contribution Rate is lower than Messer et all 2007 according to the conclusion in Andreoni 1995

No Status Quo without Voting and Cheap Talk

Status Quo without Voting and Cheap Talk

No Status Quo with Voting and Cheap Talk

Status Quo with Voting and Cheap Talk

Positive vs. Negative (No Status Quo)

Positive vs. Negative (Status Quo)

Positive vs. Negative (No Status Quo with V&C)

Positive vs. Negative (Status Quo with V&C)

CONCLUSION Voting and Cheap Talk can largely eliminate the externality problem The effect of Status Quo is different with V&C and without V&C which also requires future works The difference between the positive and negative frameworks diminishes from round to round without Voting and Cheap Talk

Any Questions or comments? Thank you! Any Questions or comments?