An Experimental Economics Examination of Behavioral Anomalies, Group Decision Making and the Provision of Public Goods

Cornell Univ - State: Awds Made Prior May 2010, Ithaca NY

Investigators

Abstract

The proposed research undertakes a systematic examination of the impact of behavioral anomalies on the demand for and provision of public goods. Since the joint application of psychology and economics to the study of public goods is a relatively new area of inquiry, the research focuses on a preliminary list of major anomalies that are likely to show substantive biases in public decision-making. Similarly, there are a large number of public good mechanisms that could be utilized, ranging from purely voluntary, such as those typical of fund drives, to those that are coercive in nature, such as public referenda. The four public good mechanisms explored in the research were chosen because of their real world applicability and include: (1) the voluntary contributions mechanism (VCM) which is commonly used for charitable giving; (2) Voting, the most utilized mechanism for government provision of public goods; (3) the Provision Point Mechanism (PPM) which is the second most common mechanism for private funding of public goods and utilizes a threshold to partially overcome free riding; and (4) the Proportional Contribution Mechanism (PCM) which is a form of matching grants to encourage voluntary contributions. The anomalies explored in the research include status quo bias and other manifestations of the value function of prospect theory (reluctance to trade, loss aversion, etc.); framing of choices including the number and order of choices; risk and uncertainty in the provision of public goods such as group insurance or provision of a group lottery (potential anomalies include overweighting, risk dismissal, and ambiguity); and discounting of public versus private goods where hyperbolic discounting may arise and public rates may be lower than private rates). The research will hopefully show that voluntary mechanisms (forms of charitable giving), that are an increasingly important form of support for environmental and social programs, may be amenable to improvements by using insights from psychology and behavioral economics. The possibility also exists that the research may yield an improved understanding of voting behavior under conditions of risk and uncertainty which may help with decisions regarding hazardous facilities, nuclear power, climate change, homeland security, etc. Similarly, a better understanding of behavioral anomalies in inter-temporal choice regarding issues, such as budget deficits, the failure to reform social security, and other social programs that are in difficulty may help public decision-making. Also, a better understanding of the effects of order and context in voting wherein, for example, substantial funding is easily voted for the first major program passed by a legislative body, but following programs get progressively more poorly funded. Behavioral anomalies in public good values may also have implications for benefit cost analysis (BCA). BCA has been required for Federal regulations since issuance of Executive Order 12291 in 1980.