Public Good Provision, Punishment, Cooperation, and Defection - Essay Example

Affiliation: Public good provision, punishment, cooperation, and defection: A discussion on the view: Fehr and Gächter (2000a) that “Many societies face the problem of how to provide public goods. For a group of self-interested agents, of course, public goods present the difficulty that since all agents will want to be free-riders on the efforts of others, no agent will contribute willingly to the public good.” (p.163). They further conclude that “… the self-interest model has … failed to give satisfactory explanations for a wide variety of questions of interest to economists, including questions about labor market interactions, public goods, and social norms.” (p.178) CONTEXT: The theories in economics have treated human beings as utterly selfish individuals who think of self interest only, though so may be the case, to a great extent, but human behavior shows more of reciprocal tendency i. e. People are much nicer with those who care for them while a lot more harsh with those who annoy them. The effect of this positive and negative reciprocity is much more than predicted by an absolutely self-interest theory (Fehr and Gächter, 160). Rabin(1281) also found that people judge fairness in the context as they want to help those who are helping them and punish those are hurting them, even at a cost. He felt that people do not show uniformity in such feeling. In real life also it is common to see that if an employee is loyal to employer than the latter also treats him well although it may not be in the interest of employer. Other examples are voluntary reduction of water or electricity use during shortages. While the negative act for fairness is, a consumer would not buy a product costing unfairly even if he needs it, or after ill-treatment an employee may turn to malign the reputation of the company. A longer strike by labor union to punish unfair company policies, is another example of people’s strong inclination towards fair treatment. Such behavior is more common than anticipated. Andreoni (891) emphasized that on average about half of cooperation comes from subjects who understand free riding yet choose to cooperate. Thus majority of the incidents in real life are reciprocal though free riding has a non-negligible presence in the society. The article discusses basic human behavior viz. reciprocity, fairness, punishment on public goods allocations, as deviation from predominant self interest theories. RELATION TO GAME THEORY According to most theories people are self interested except the one pointing to altruism (Rabin 1281). Contrary to this common view, people do cooperate and are not only selfish individuals. However, the cooperation is unpredictable and decline overtime ( Fischbacter et al 397). An experiment by Cronson et al (96) for public goods allocation under voluntary contribution mechanism (VCM) and weakest link mechanism (WLC), may clear the meaning better. In the standard experimental set up for VCM, The subject gets payoff equal to his/her allocation to private account plus half of the group’s total allocation to public account. The Nash equilibrium is for total free ride though non-efficient socially. The WLM also has same set up except the pay offs, the subject gets payoffs equal to his contribution to private account and double of the groups’ minimum allocation to the public account. All allocation to the public account is pareto –ranked equilibria but anything more than minimum allocated to public account is socially inefficient. The results differed from what expected theoretically. Allocations to the public good in the VCM are significantly different than zero, starting at around 40% of endowment and declining thereafter. However when game is restarted, the contributions also restart rather than picking up from the lowest just finished. Allocations in the WLM are also not at equilibrium; as much as 118 out of the 120 periods ,i. e. 20 periods for each group times six groups, the individuals in the groups allocated different amounts to the public good rather than mere minimum (97). In both games equilibrium play is hardly ever observed. They found that participants in the VCM attempt to match the contributions of others in their group. Subjects in the WLM, in contrast, do not go much beyond the minimum contribution of others in their group (98-100). The economics theories have overlooked the intentions of the subjects and mistakenly concluded on the basis of final outcome. The article thus uses experiments from the literature, whereby the incentives have been removed and/or punishment for free riders has been added, to bring out actual public behavior in goods allocation REVIEW OF RELATED WORK All the theories in economics support free riding yet people contribute, half of them, to public goods and show cooperation. What are the reasons, the social conditioning, kindness, confusion, reciprocity or fear of punishment? It is necessary for accuracy of conclusion to study all these factors separately. This was studied by Andreoni (894) after removing social factors and incentives for contribution. In Andreoni’s present experiment an attempt has been made to observe kindness and confusion as reasons for cooperative behavior) (891-2). (894) The experiment has three condition first is the regular public goods standard, where the subject is paid according to his experimental earning.. Second is rank, similar to regular but the subject is given rank and paid according to rank for e.g. if two subjects are tied at one rank they the average payoffs. In other words the biggest free rider gets highest payment while there is no reward or contribution. Mutual cooperation results in minimum payoffs. The incentives for kindness or altruism are removed. In the situation it is unlikely that any one subject would wish to make least amount of money Secondly, the contributors may do equal contribution for equal payoff but here the contribution would be zero. As it achieves goal equality and is cheat proof not a situation in real world . Finally payment according to rank introduces a new complexity that creats confusion. Here, the information about rank may change contributors’ behavior and in a bid to finish first there may not be any kindness. Besides, the regular and rank games a third regrank game is also introduced. Here the contributors are told about their rank but not paid according to rank, only on the basis of their experimental earnings. In this experiment the differences between cooperation in regrank and rank is due to kindness. Cooperation in rank condition is due to confusion and cooperation differences in regular and regrank may either be as a result of kindness or confusion (894-5). The results of the experiment indicated that: 1. Removal of incentives for kindness increases free riding by subjects. The contributions are reduced to one third of control experiment. 2. Nearly half the contributions are due to kindness indicating it a very strong factor. 3. The decline in repeated runs of the experiment are not as a result of learning the trick rather these indicate anguish resulting from kindness. Why free riding is not dominant? It may be due to strong cultural/ social ethics viz. kindness or subjects may have not grasped the incentives clearly leading to confusion.(Andreoni, 892) Kindness is predominantly shown in real life conditions in cases of donations to charities. Do people co-operate when they know what others are contributing? The experiment by Fischbacter et al (401- 403) had following set up: 44 subjects in group of four were given 20 tokens to allocate to public or private accounts. These allocations to be done in two ways, unconditionally i. e. as they wished and, Secondly, on the basis of contribution of others as provided in a contribution table showing 21 contribution (0-20) of others. The 22 subjects showing cooperative behavior had following categories: Majority (16) of these cooperative contributors matched their contributions with others but depicted a tendency to remain slightly lower while four subjects exactly matched others contributions. But only 12% of the 22, contribute more than others. 13 subjects are totally free riders and six subjects show cooperation till they spend 10 tokens and thereafter they behaved in selfish manner for remaining 10 tokens. The results indicated that In absence of punishment, a non-negligible fraction of subjects free rides regardless of others’ contribution. Secondly, even those who are conditionally cooperative or reciprocate others’ contributions display a bias in the self-serving direction in that they contribute less than the others (Fischbacter 403). So self interest plays a role in natural human inclinations. Let us see our next experiment as to what happens when a punishment for free riding is introduced. Moreover, where do economist err and conclude that selfish behavior dominates, may also be explained by following experiment of Fehr and Gachter (166): Four subjects are given 20 tokens each to invest either privately or for public goods. A subject gets a token each for every token invested privately and 0.4 token if same is allotted publicly. Since there are four subject so social return for one token is 1.6 compared to just one for allotted privately. Subjects as a result of self interest keep their tokens and earn 20 tokens while if they had invested all their tokens in public project, they would have earned 32 tokens. The reciprocal people retaliate, to punish free riders, by not contributing to the public project (negative reciprocity) and thus become or in fact appear self-interested. Here, the self interested have induced reciprocals to turn self-interested. Though, the actual motive of reciprocals is to punish free-riders. This is what makes economists declare the dominant human behavior as selfish. Consider the changed situation where the reciprocals know who are free –riders and can punish them also. Suppose, to punish a free rider with x token the punisher has to pay x/3 token. Again as the punishment is costly so free rider would never punish. While in spite of costly punishment, the reciprocal would punish a free rider. As a result the fear of punishment forces free riders to begin contributing. While if all the subjects were selfish, as propounded by theories, the results of experiments would not have changed. Direct punishment changes result of public good game to cooperative. The subjects who show a reciprocal behavior in a game are 40-66 percent while selfish behavior is shown by 20-30 percent.( Fehr and Gächter 164). Fehr and Gächter (160) believe that Whether a reciprocal type would dominate or the self-interest type depends on circumstances unlike views of some economists that self-interest types dominate always. Though reciprocity may be different from cooperation since it is an action against friendly or hostile gestures yet in economics there would rarely be any difference between cooperation and reciprocal behavior. Many times companies provide free samples of their products. It is difficult for people to take a free sample without buying it and particularly so if it is given by a smiling salesman. As a result people buy the product even if they do not use it. While consumer refusing to buy product of a monopolist company, if priced unfairly, also shows reciprocity though of a negative kind. Consider an incomplete contract situation in a very competitive market; the reciprocal type dominates while in no incentives for co-operation situation, the self –interest type would be dominating. But change the latter condition by putting punishment to non-contributors again the reciprocals would be dominating. As stated earlier, the reciprocal types retaliate more strongly than expected so they punish harshly to self interest type in this situation, and a very high level of cooperation is achieved. Conclusion: The article has focused on : 1. Contrary to theories of economics pointing to totally selfish nature of human in public goods allocation, people do show a cooperative behaviour though a non-negligible numbers are selfish types. 2. People cooperate better when aware that others are cooperating. 3. A direct punishment enhances cooperation by free riders. Work cited Andreoni, J. “Co-operation in Public-Goods Experiment: Kindness or Confusion?” The American Economic Review, 85(4) (1995): 891-904. 2 Feb 2009 http://socserv.socsci.mcmaster.ca/bjerk/PublicPapers/Andreoni95.pdf Croson, Rachel, Enrique Fatas and Tibor Neugebauer. “Reciprocity, matching and conditional cooperation in two public goods games”. Economics Letters. 87 (2005): 95–101. 1 Feb 2009 http://www.uv.es/fatas/papers/EL_2005.pdf Fehr , Ernst and Simon Gächter. “Fairness and Retaliation: The Economics of Reciprocity”. Journal of Economic Perspectives. 14 (2000); 159-181. 1FEB 2009. http://www.iew.uzh.ch/wp/iewwp040.pdf Fischbacher, Urs, Simon Gächter and Ernst Fehr. “Are people conditionally cooperative? Evidence from a public goods experiment”. Economics Letters, 71 (2001): 397–404. 2 FEB 2009 http://www.iew.uzh.ch/study/courses/downloads/Fischbacher_etal.pdf Rabin, Matthew. “Incorporating Fairness into Game Theory and Economics”. The American Economic Review, 83(5)(1993): 1281-1302. 2 Feb 2009 http://www.lrz- muenchen.de/~u516262/webserver/webdata/rabin1993_incorporatingfairness_aer.pdf Read More