Public Good Contributions and Peer Punishment

4.7 of The Economy 1.0 & The Economy #2

This graph comes from an experiment in which, each round, 4 strangers each receive $20 and choose how much to contribute to a shared pool. Every dollar contributed pays $0.40 back to each member. This repeats 10 rounds. After each round, members are told the contributions each other member made

-EG: You contribute £10, and each member, including you, gets £2.50.

-What would theory suggest, and what does the data actually show?

-Theory would suggest this experiment mimics a prisoner’s dilemma, because one does the best by not contributing.

-So the first round came as quite a backfire to theory - every city contributed! Though different in scale, it shows that homo economicus is not the only characteristic. People contributed highly as they expected others to contribute highly too - they showed signs of optimism and altruism

-Of course, as the rounds progressed, the amount contributed fell, showing that the tragedy is still real. But no city ever went to £0 contributed. They always had signs of altruism. Note that economics alone fails to explain why Muscat falls less than Copenhagen.

Why did the level of contribution fall as the rounds progressed?

-Contributions cut their cooperation if they saw signs that others were contributing less than expected, thus free riding on their contributions

-Thus, the only way those contributing could punish those who were free-riding was to cut their contribution. Thus explaining the natural fall in contribution

-Thus, a disappointing expectation of reciprocity drove the contributions down

The tragedy of the commons…

This experiment: ‘Each round, 4 strangers each receive $20 and choose how much to contribute to a shared pool. Every dollar contributed pays $0.40 back to each member. This repeats 10 rounds. After each round, members are told the contributions each other member made

-EG: You contribute £10, and each member, including you, gets £2.50.’

Now has a new rule. After observing the contributions, individual players could punish other players by making them pay £3 fine. The punisher remained anonymous, but had to pay £1 per player punished.

What happens now to contributions, and what can be said about them?

-A rise in contributions is seen, as now individuals who think that others have been unfair or violated a social norm can now properly retaliate, as it now costs free riders to free ride

-Thus, high levels of contributions can be achieved with large groups of people across the globe, by repeated interactions and social preferences.

-Note that the punishments can be seen as a temporary helping hand. The influence of strangers, erosion of trust, thus long-term norms may still be harmed. That is what Ostrom pointed out

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