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Status Quo Bias and Voluntary Contributions: Can Lab Experiments Parallel Real World Outcomes for Generic Advertising?

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  • Messer, Kent D.
  • Kaiser, Harry M.
  • Schulze, William D.

Abstract

This paper exploits a unique opportunity to test parallelism between the field and laboratory for the Voluntary Contribution Mechanism (VCM). Most commodities in the United States have checkoff programs assessing producers for generic advertising and promotion, a public good for producers. Examples include: Got Milk? and the Incredible Edible Egg. Originally, participation in many of these programs used the VCM and the freeriding observed follows a similar pattern to that seen in the laboratory by experimental economists. For example, a substantial amount of historical information is available for the egg industry’s generic advertising program. We simulate both the economic and psychological details of this industry in a parallelism experiment. The results over eleven rounds of the VCM conducted in the laboratory are strikingly similar to the real-world results for the American Egg Board’s program from 1977 to 1988. We also replicate the positive vote in favor of a mandatory program to replace the VCM that occurred in 1988. All commodity checkoff programs today are mandatory. Yet the constitutionality of mandatory checkoff programs has recently been challenged on the grounds that mandatory programs violate individual producer’s free speech rights under the First Amendment. In light of this legal uncertainty, this paper explores the feasibility of using a voluntary provision point mechanism (PPM) which closely follows the institutional design of the VCM and mandatory programs used by the egg industry. Our results suggest that although the PPM performs better than the VCM, both mechanisms in this institutional setting yield far higher levels of contributions than those obtained in prior research. Thus, the research next explores why the levels of giving observed for generic advertising are higher than traditionally observed in the lab. Our results suggest that the institutional design employed by the American Egg Board and others where assessments were collected first and then having producers request refunds afterwards, established a social norm, or reference point, which leads to higher levels of contributions through status quo bias. This bias appears to increase contributions in both the VCM and PPM. However, this effect decreases over rounds as contributions still appear to converge to the Nash equilibrium of zero contributions in the case of the VCM and to the particular Nash equilibrium of just covering costs of the provision point in the PPM.

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Bibliographic Info

Paper provided by Cornell University, Department of Applied Economics and Management in its series Research Bulletins with number 122094.

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Date of creation: Feb 2004
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Handle: RePEc:ags:cudarb:122094

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Keywords: Marketing;

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References

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  1. Samuelson, William & Zeckhauser, Richard, 1988. " Status Quo Bias in Decision Making," Journal of Risk and Uncertainty, Springer, vol. 1(1), pages 7-59, March.
  2. Rose, Steven K. & Clark, Jeremy & Poe, Gregory L. & Rondeau, Daniel & Schulze, William D., 1999. "The Private Provision of Public Goods: Tests of a Provision Point Mechanism for Funding Green Power Programs," Working Papers 127699, Cornell University, Department of Applied Economics and Management.
  3. Reberte, J. Carlos & Schmit, Todd M. & Kaiser, Harry M., 1996. "An Ex Post Evaluation of Generic Egg Advertising in the U.S," Research Bulletins 122835, Cornell University, Department of Applied Economics and Management.
  4. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard H, 1990. "Experimental Tests of the Endowment Effect and the Coase Theorem," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1325-48, December.
  5. Mark Isaac, R. & McCue, Kenneth F. & Plott, Charles R., 1985. "Public goods provision in an experimental environment," Journal of Public Economics, Elsevier, vol. 26(1), pages 51-74, February.
  6. Johnson, Eric J, et al, 1993. " Framing, Probability Distortions, and Insurance Decisions," Journal of Risk and Uncertainty, Springer, vol. 7(1), pages 35-51, August.
  7. Marks, Melanie B & Croson, Rachel T A, 1999. " The Effect of Incomplete Information in a Threshold Public Goods Experiment," Public Choice, Springer, vol. 99(1-2), pages 103-18, April.
  8. R. Isaac & David Schmidtz & James Walker, 1989. "The assurance problem in a laboratory market," Public Choice, Springer, vol. 62(3), pages 217-236, September.
  9. John M. Crespi, 2003. "The Generic Advertising Controversy: How Did We Get Here and Where Are We Going?," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 25(2), pages 294-315.
  10. Gregory Poe & Jeremy Clark & Daniel Rondeau & William Schulze, 2002. "Provision Point Mechanisms and Field Validity Tests of Contingent Valuation," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 23(1), pages 105-131, September.
  11. Marks, Melanie & Croson, Rachel, 1998. "Alternative rebate rules in the provision of a threshold public good: An experimental investigation," Journal of Public Economics, Elsevier, vol. 67(2), pages 195-220, February.
  12. Bagnoli, Mark & McKee, Michael, 1991. "Voluntary Contribution Games: Efficient Private Provision of Public Goods," Economic Inquiry, Western Economic Association International, vol. 29(2), pages 351-66, April.
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Cited by:
  1. Norwood, F. Bailey, 2005. "Can Calibration Reconcile Stated and Observed Preferences?," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 37(01), April.
  2. Messer, Kent D. & Schmit, Todd M. & Kaiser, Harry M., 2005. "Optimal Institutional Mechanisms for Funding Generic Advertising: An Experimental Analysis," 2005 Annual meeting, July 24-27, Providence, RI 19130, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  3. Kent D. Messer & Harry M. Kaiser & Gregory L. Poe, 2007. "Voluntary Funding for Generic Advertising Using a Provision Point Mechanism: An Experimental Analysis of Option Assurance," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 29(3), pages 612-631.

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