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1
University of Auckland Winter Week Lectures
Second Lecture3 July 2007
Associate Professor Ananish Chaudhuri
Department of Economics University of Auckland
2
Back to the example of building a public park• A public park is a public good
• non-rival in consumption • benefits are non-excludable.
• A good is non-rival in consumption when A’s consumption of it does not interfere with B’s consumption of it. The benefits of the good are collective—they accrue to everyone.
• A good is non-excludable if, once produced, no one can be excluded from enjoying its benefits. The good cannot be withheld from those that did not pay for it.
3
Examples of Public Goods
• Fire Service• Police• National Defense• Highways• Public Parks • Environment• Hospitals• Public Libraries
4
Problems of Cooperation
• Cooperative hunting and warfare (important during human evolution)
• Exploitation of common pool resources• Clean environment• Teamwork in organizations• Collective action (demonstrations,
fighting a dictatorship)• Voting
5
Basic economic problem• Cooperative behavior has a
positive externality.• Hence, the benefit to society
exceeds the benefit to the private person providing it.
• Therefore private individuals are willing to incur the cost of providing this if and only if enough others do so.
6
A Public Goods Game
• Group of 4 players• Each of them has $5• Each can contribute to either a
“private” account or a “public” account
• Money put in the private account remains unchanged
7
A Public Goods Game
• Money contributed to the public account
• doubled by the experimenter• redistributed equally among members
of the group
• The question is – how much should each person contribute?
8
A Public Goods Game
• Total amount in the public account =
• Doubled amount =
• Divided by four each person gets back =
9
A Public Goods Game
• Analogous to a Prisoner’s Dilemma• For maximum social benefit, each
player should put all $5 into the public account
• A total of $20 which gets doubled to $40
• Redistributed equally gets $10 for each player
• 100% return on investment
10
A Public Goods Game• The self-interested strategy is to free-
ride (i.e. not to put any money in the public account)
• Suppose I contribute $1, but no one else does
• $1 gets doubled to $2• Redistributed equally gets $0.50 for
each group member• I lose $0.50 while other players (who
have not contributed anything) gain $0.50
11
A Public Goods Game
• Self-interest suggests that no player has an incentive to contribute
• Even though social benefit is maximized when everyone does so
• This game has been used extensively to look at issues of cooperation and selfishness in such social dilemmas
12
A few points to bear in mind
• Simultaneous decisions• All players make contribution
decisions at the same time
• One-shot game
• Finitely-repeated game
13
One shot game
• Players play the game once and only once
• We would expect self-interested players to free-ride
14
Finitely repeated game
• Players know that they will play the game a certain number of times – say 5 times. Players know with certainty when the game will end.
• We would still expect self-interested players to free ride on the basis of backward induction
15
Backward Induction
• You already have an idea of what backward induction is
• You start with what will happen at the end and work your way backwards
• Where I want to end up often dictates where and how I should start
Finitely repeated game - what would happen in the fifth and last play of the game?
• All self-interested players would free-ride
• If players anticipate that then they should also free-ride on the fourth play of the game
• If players anticipate that then they should also free-ride on the third play of the game
• And so on
• So they should free ride from the very start of the game
17
A few points to bear in mind• Anonymity
• Participants never learn the decisions made by other participants
• Single-blind protocol• experimenter can see decisions made by
participants
• Double-blind protocol• Even experimenter cannot see decisions made by
each individual
18
10%
20%
30%
40%
50%
0%
Rounds
Pe
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ge
Co
ntr
ibu
ted
60%
70%
1 2 3 4 5 6 7 8 9 10
Pattern of contributions when the game is played ten times with a known end-point
19
Why do people do what they do?
• Not everyone contributes in the middle to start with
• Some people contribute everything at the beginning while others contribute less
• Some contribute nothing from the very beginning
20
Why do people do what they do?• A number of puzzles here• Why do people cooperate at the
beginning and free-ride later?• If they are going to free-ride why
do they not start to do so immediately?
• Why do contributions start around 40% - 60%?
21
Why do people do what they do?• We have already argued that free-riding
is the self-interested course of action
• So maybe that is easier to understand
• But how about the ones who contribute a lot?• Are they being purely altruistic?• That is – do they contribute because they
care about the welfare of others?
22
Why do people cooperate?
• It turns out that the motivation behind cooperation is far more nuanced than pure (unconditional) altruism
• People are conditional cooperators
• Beliefs regarding the actions of fellow group members play a crucial role
23
Conditional Cooperation- Fehr, Fischbacher and Gächter
• Players are asked to choose • An unconditional contribution• A conditional contribution, i.e., for
every given average contribution of the other members they decide how much to contribute.
• A selfish player is predicted to always choose a conditional contribution of zero.
25Chaudhuri and Paichayontvijit (2006), n = 88
0
1
2
3
4
5
6
7
8
9
10
0 1 2 3 4 5 6 7 8 9 10
Average Contribution of Other Group Members
Ow
n C
ontr
ibut
ion
ConditionalCooperators(61.8%)
26Chaudhuri and Paichayontvijit (2006)
0
1
2
3
4
5
6
7
8
9
10
0 1 2 3 4 5 6 7 8 9 10
Average Contribution of Other Group Members
Ow
n C
on
trib
uti
on Free Riders (16.2%)
ConditionalCooperators(61.8%)
27Source: Chaudhuri and Paichayontvijit (2006)
0
1
2
3
4
5
6
7
8
9
10
0 1 2 3 4 5 6 7 8 9 10
Average Contribution of Other Group Members
Ow
n C
on
trib
uti
on
Free Riders (16.2%)
Weak Cooperators(7.4%)
ConditionalCooperators(61.8%)
28Source: Chaudhuri and Paichayontvijit (2006)
0
1
2
3
4
5
6
7
8
9
10
0 1 2 3 4 5 6 7 8 9 10
Average Contribution of Other Group Members
Ow
n C
on
trib
uti
on
Free Riders (16.2%)
Weak Cooperators(7.4%)
ConditionalCooperators(61.8%)
Hump ShapedContribution (5.9%)
29Source: Chaudhuri and Paichayontvijit (2006)
0
1
2
3
4
5
6
7
8
9
10
0 1 2 3 4 5 6 7 8 9 10
Average Contribution of Other Group Members
Ow
n C
on
trib
uti
on
Free Riders(16.2%)
WeakCooperators(7.4%)
ConditionalCooperators(61.8%)
Hump ShapedContribution(5.9%)
Overall Mean
30
Results
• Unconditional cooperation is virtually absent.
• Heterogeneity:• Roughly half (or more than half) of
the subjects are conditional cooperators.
• Only a minority are free-riders (selfish).
31
Role of Beliefs
• Participants have very different beliefs about the contributions to be made by group members
• And they choose their contribution levels based on those beliefs
32
BL=0 (16%)
0
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100
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Round
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C
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BL=0 (16%)
What if participants could not see what others are doing?
33
0
10
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70
80
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100
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Round
Pe
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Co
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BL=0 (16%) BL=1 (68%)
What if participants could not see what others are doing?
34
0
10
20
30
40
50
60
70
80
90
100
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Round
Pe
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Co
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n
BL=0 (16%) BL=1 (68%) BL=2 (16%)
What if participants could not see what others are doing?
35
Role of beliefs
• Those with optimistic beliefs might start out with high contributions
• But over time as they see the average contributions fall they start to reduce their contribution
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