Voluntary Provision of a Public Good - Essay Example

The Voluntary Provision of a Public Good Does government taxation affect the decisions of individuals to contribute voluntarily to the public good?Will it inhibit individuals from voluntarily donating to the public good thereby giving credence to the “crowding out” effect postulated by some theoretical papers? The idea that the altruism, which underpins voluntary contributions to the public good, can be affected by extrinsic factors such as taxation has been the subject of several previous studies. Professor James Andreoni, author of An Experimental Test of the Public-Goods Crowding out Hypothesis, believes that, on the basis of an experiment conducted by him, taxation results only in an incomplete crowding out and effectively persuades subjects to be more cooperative. This is a postulation that is rather disputable, especially to an economics student like me, considering that it seems to contradict the commonsensical idea drummed into my head from the beginning that individuals always act and decide in their best interest. The experiment that Econ404 class recently conducted, modeled after Professor Andreoni’s methodology and design with the Nash equilibrium pegged at 3, showed that in the absence of tax, the majority of the individual contributions were either 3 or exceeded 3; when a tax of 2 points was implemented, individual contributions rarely exceeded 3 while a majority gave 1 or 0 contribution. Nevertheless, despite the imposition of tax 2, the average contribution although not reaching 3 points was nevertheless above 0, sustaining the incomplete crowding out theory and somehow giving credence to the “warm glow” hypothesis. The class experiment was conducted to simulate public investment into the public good and find out the underlying reasons that motivate individuals to contribute to it. Moreover, it puts to the test two contending theories: the crowding out effect of involuntary contribution, and; the theory that people are motivated by altruism or the warm-glow principle in contributing to the public good so that extrinsic factors like taxation will not alter an individual’s decision to contribute. In the present experiment, results showed that in the non-taxed rounds, the players, on the average, exceeded the given Nash equilibrium by .333333 points, implying an overall impression that the subjects were willing to contribute to the public good but not to the extent of deviating significantly from the standard or equilibrium. On the other hand, the taxed rounds revealed a negative deviation of 1.277778 from the given Nash equilibrium of 3 and resulted in a difference of 1.055555 from the non-taxed mean contributions. The results, superficially, lead us to believe that a crowding out may result if persons are taxed, but albeit substantial such a crowding out is not complete giving credence to the claim of the “warm glow” theory. A closer scrutiny of the non-taxed rounds reveal that the willingness to give to the public good was more positive initially but dissipated a little bit in the last two rounds to the extent that the last round posted an average contribution even lower, albeit minimally, than the Nash equilibrium. The overall willingness to give especially in the first two rounds, however, may be partly explained by the observation of Robyn Dawes and Richard Tyler (1988) that experimental subjects are generally more accommodating than as predicted by the Nash equilibrium theory. The comparatively positive willingness of the subjects to contribute to the public good in the first two rounds may be explained by the fact that many of the students, who had no prior experience in the experiment, had not fully grasped the significance of their contribution and were just testing the waters, so to speak. However, as the rounds wore on the ‘rational person’ may have taken over, took stock of the situation and calculated and adopted strategies that would place him in a win-win situation, which is maximizing investments in the public good and at the same time maximizing private investments. The aforesaid observations are evident from the history of the public investments made by Teams 4, 7, 9, 11, and 18 in the non-taxed rounds, where contributions were initially high but decreased on the last two rounds. In addition, some of the moves of the teams are evidently strategic. Team 1 for example, consistently had one member contribute low while the partners contributed very high, allowing for a higher payout. Similarly, Teams 2 and 16 seemed to have established that pattern. As to how such a pattern could have been established considering the confidentiality and secrecy imposed is not clear. In the taxed rounds, which was simulated by subtracting 2 points from each team and adding it to the public good and at the same time retaining the Nash equilibrium of 3, 0 contributions began to appear considerably, an occurrence that happened only once in the non-taxed rounds. The implication of the considerable number of 0 contributions during these rounds imply that taxation does affect a significant number of individuals in their decision to contribute to the public good giving credence to the “crowding out” hypothesis. However, there are instances during these rounds when some subjects exceeded the Nash equilibrium of 3 and contributed 4 points implying that the factor of taxation did not factor in to their decisions to give to the public good. It would be difficult to actually pinpoint the exact motivation of the subjects in contributing even beyond the equilibrium despite the taxation implemented in these rounds. In addition, whether this phenomenon can simply be attributed to the “warm glow” theory is, at this stage, dubious. The overall results of the class experiment in the end did not really parallel that of the experiment of Prof Andreoni point by point. While both experiments provided credence to the incompleteness of the crowding out theory, Professor Andreoni’s experiment supported the notion that subjects become more cooperative when taxation is imposed as evidenced by the mean of the contributions of the subjects post tax which was 3.35 compared to the mean in the present experiment which is 1.277778 post-tax. In the former, there was no negative deviation from the Nash equilibrium but in the class experiment, there was a considerable decrease of the contributions from the given standard refuting the position that taxation encourages cooperation among the subjects somehow playing down the warm glow effect. In conclusion, the experiment had satisfactorily supported, at least, the incompleteness of the crowding out effect of government taxation. Thus, extrinsic factors like taxation potentially affect an individual’s desire to contribute to the public good and that effect leans towards the negative. Simply put, an individual may decide to give less or not at all to the public good after the government taxes him or her and applies the tax to the public good, although prior to taxation, such a person is willing to part with some or a considerable part of his resources for the public good. However, there are a few people who may, despite taxation, still contribute the same or even more of the amount to the public good. The latter phenomenon is attributed by some economists to altruism or the warm glow theory. The conclusiveness of the findings in the class experiment should, however, be made subject to more extensive studies. In the first place, the economic environment being simulated inside the classroom during the experiment may not be faithful to the economic environment in the outside world, and behavior of individuals in one may not necessarily parallel their behavior in the other. Classroom experiments involve pre-programmed point-system incentives that may not be of analogous value in the actual world. Actual economic reality may still alter behavior and may turn passive generosity into feelings of uncharitableness when contribution to the public good involves resources from hard-earned money. Read More