AN EXPERIMENTAL ANALYSIS OF CONDITIONAL COOPERATION

Experimental and empirical evidence identifies the existence of socialpreferences and proposes competing models of such preferences. In this paper, wefurther examine one such social preference: conditional cooperation. We run threeexperimental public goods games, the traditional voluntary contribution mechanism(VCM, also called the linear public goods game), the weak-link mechanism (WLM) andthe best-shot mechanism (BSM). We then analyze the existence and types ofconditional cooperation observed. We find that participants are responsive to the pastcontributions of others in all three games, but are most responsive to differentcontributions in each game: the median in the VCM, the minimum in the WLM and themaximum in the BSM. We conclude by discussing implications of these differences forbehavior in these three mechanisms. This paper thus refines our notions of conditionalcooperation to allow for different types of public good production functions and byextension, other contexts.experimental economics, conditional cooperation, public goods

Investment Decisions and Emissions Reductions : Results from Experiments in Emissions Trading

Emissions trading is an important regulatory tool in environmental policy making. Unfortunately the effectiveness of these regulations is difficult to measure in the field due to the unavailability of appropriate data. In contrast, experiments in the laboratory can provide guidance to regulators and legislatures about the performance of different market features in emission trading programs. This paper reports on the implementation of three different institutional designs, and presents experimental results investigating important features of emissions trading regimes: the ability to make investments in emissions abatement, ability to bank allowances and a declining emissions cap, both with and without uncertainty. These features are observed in virtually all existing air pollution emissions trading programs currently in place and will almost certainly be part of future applications. Like previous experimental studies of emissions trading, this paper shows that the efficiency gains expected from economic theory emerge observationally. We also show reduced efficiency when permits are bankable due to over-banking and when investments in emissions abatement are possible due to overinvesting. These tendencies do not worsen, however, when emissions caps decline.Emissions Trading, Investment in Abatement, Banking, Laboratory Experiments

Customizing Reinsurance and Cat Bonds for Natural Hazard Risks

This paper has the following two objectives: to examine how reinsurance coupled with new financial instruments can expand coverage to those residing in areas subject to catastrophic losses from natural disasters, and to show how reinsurance and the catastrophe-linked financial instruments can be combined so that the price of protection can be lowered from its current level. To address these two questions we define the key stakeholders and their concerns with respect to catastrophic risks. We then construct a simple example to illustrate the relative advantages and disadvantages of catastrophe bonds and reinsurance in supporting a structure of payments contingent on certain events occurring (e.g. a severe flood in Poland or a major hurricane in Florida). On the basis of this comparison we suggest ways to combine these two instruments to expand coverage to those at risk and reduce the cost of protection. We suggest six principles for designing catastrophic risk transfer systems, and describe how they may be put into practice. The paper concludes by raising a set of questions for future research. The unexpectedly large insured losses from Hurricane Andrew in the Miami, Florida area in 1992 ($15.5 billion) and the Northridge earthquake in California in 1994 ($13.5 billion) has forced the insurance industry to reevaluate whether it can provide coverage to all property in hazard-prone areas against catastrophic losses in the future. New institutions have been created such as windstorm pools in Florida and the California Earthquake Authority (CEA) to supplement or replace traditional reinsurance. At the same time the capital markets have developed new financial instruments such as Act-of God bonds to provide protection against these large losses from natural disasters. To date, these new instruments have only made a small dent in the market for protection against the financial consequences of catastrophic events, although there is the expectation by many that they will play a larger role in the future. Our approach is to examine whether the private market can offer ways to provide financial backing to deal with these risks. More specifically, the private market can provide hedges against catastrophic risks through catastrophe-linked securities, traditional excess-of-loss reinsurance and certain customized reinsurance coverage schemes. This paper has the following two objectives: (1) to examine how reinsurance coupled with new financial instruments can expand coverage to those residing in areas subject to catastrophic losses from natural disasters, and (2) to show how reinsurance and the new financial instruments can be combined so that the price of protection can be lowered from its current level. To address these two questions we begin our analysis by defining the key stakeholders and their concerns with respect to catastrophic risks. We then construct a simple example to illustrate the relative advantages and disadvantages of catastrophe-linked securities and reinsurance in supporting a structure of payments contingent on certain events occurring (e.g. a severe flood in Poland or a major hurricane in Florida). On the basis of this comparison we suggest ways to combine these two instruments to expand coverage to those at risk and reduce the cost of protection. We suggest six principles for designing catastrophic risk transfer systems, and describe how they may be put into practice. The paper concludes by raising a set of questions for future research.

Information in Ultimatum Games: An Experimental Study

This study reports on an experiment using variations of the ultimatum game. The experiment controls the amount and type of information known to the responder in the game. In two treatments, she knows both the absolute (money) and relative (fairness) payoffs from an offer. In the other two, she knows either only the absolute or only the relative payoffs. The predictions of four models for these treatments are tested: subgame-perfection, Bolton\u27s comparative equilibrium, Ochs and Roth\u27s absolute threshold, and Ochs and Roth\u27s percentage threshold hypothesis

Feedback in Voluntary Contribution Mechanisms: An Experiment in Team Production

Alchian and Demsetz\u27s (1972) classic paper models team production as a public good. They claim detection of individual effort levels, rather than aggregate effort levels, reduces shirking (free riding). This paper experimentally tests this claim. Participants are informed either about the individual contributions of others on their team or only about their team\u27s total contribution. Average contributions in the two treatments are the same. However, contributions under individual feedback have a significantly higher variance than those under total feedback. Implications of these results for team production are discussed

Rent-Seeking for a Risky Rent A Model and Experimental Investigation

Rent-seeking models have been used to predict and explain a wide variety of political decisions. This paper extends Tullock’s classic rent-seeking model to the case of a risky rent, where the winner of the rent-seeking contest does not receive the rent for sure, but only probabilistically. We derive the equilibrium and comparative static predictions from our extended model and present the results of an experiment with subjects from the US and Turkey to test it. Results are consistent with the comparative static predictions of the model, although we observe significantly more absolute levels of rent-seeking than the model predicts, consistent with previous experimental results. We conclude by discussing implications of our results for a variety of rent-seeking settings

Alternative Rebate Rules in the Provision of a Threshold Public Good: An Experimental Investigation

This study reports the effects of rebate rules on voluntary contributions to a threshold public good. Rebate rules specify how excess contributions, over the threshold amount are distributed. We examine three rebate rules experimentally: a no rebate policy where excess contributions are discarded, a proportional rebate policy where excess contributions are rebated proportionally to an individual\u27s contribution, and a utilization rebate policy where excess contributions provide some continuous public good. Significantly more Nash equilibrium outcomes are observed under the no rebate treatment than under either of the other two. Interestingly, the variance of contributions differs significantly between rebate treatments

Biases in Casino Betting: The Hot Hand and the Gambler’s Fallacy

We examine two departures of individual perceptions of randomness from probability theory: the hot hand and the gambler’s fallacy, and their respective opposites. This paper’s first contribution is to use data from the field (individuals playing roulette in a casino) to demonstrate the existence and impact of these biases that have been previously documented in the lab. Decisions in the field are consistent with biased beliefs, although we observe significant individual heterogeneity in the population. A second contribution is to separately identify these biases within a given individual, then to examine their within-person correlation. We find a positive and significant correlation across individuals between hot hand and gambler’s fallacy biases, suggesting a common (root) cause of the two related errors. We speculate as to the source of this correlation (locus of control), and suggest future research which could test this speculation