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Choice overload, coordination and inequality: three hurdles to the effectiveness of the compensation mechanism?

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Author Info

  • Estelle Midler
  • Charles Figuières
  • Marc Willinger

Abstract

In this paper we test the effectiveness of a compensation mechanism when a negative externality is produced. It allows agents suffering from the negative externality to compensate those who reduce its production. Transfers are implemented via a two-stage design which is an adaptation of Varian’s mechanism. It has been previously tested in the lab with different types of games, and its effectiveness turns out to depend on the experiment, for unclear reasons which we try to decipher in this paper. Three possible explanations, choice overload, mere coordination and inequality, are proposed and studied. We show that, other things equal, the larger the size of the strategy space, the lower the mechanism’s efficiency (choice overload effect). Perhaps surprisingly, the data show that the appearance of additional equilibria does not jeopardize effectiveness (no mere coordination effect). Finally, inequality of outcomes plays a key role (fairness effect).

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File URL: http://www.lameta.univ-montp1.fr/Documents/DR2013-01.pdf
File Function: First version, 2013
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Bibliographic Info

Paper provided by LAMETA, Universtiy of Montpellier in its series Working Papers with number 13-01.

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Length: 35 pages
Date of creation: Feb 2013
Date of revision: Feb 2013
Handle: RePEc:lam:wpaper:13-01

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References

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  1. Iyengar, Sheena S. & Kamenica, Emir, 2010. "Choice proliferation, simplicity seeking, and asset allocation," Journal of Public Economics, Elsevier, vol. 94(7-8), pages 530-539, August.
  2. Hal R. Varian, 1994. "A Solution to the Problem of Externalities when Agents are Well-Informed}," Microeconomics 9401003, EconWPA.
  3. Juergen Bracht & Charles Figuières & Marisa Ratto, 2004. "Relative performance of two simple incentive mechanisms in a public good experiment," IDEP Working Papers 0409, Institut d'economie publique (IDEP), Marseille, France.
  4. Botond Koszegi & Matthew Rabin, 2006. "Reference-Dependent Risk Attitudes," Levine's Bibliography 122247000000001267, UCLA Department of Economics.
  5. Cooper, David J. & Van Huyck, John B., 2003. "Evidence on the equivalence of the strategic and extensive form representation of games," Journal of Economic Theory, Elsevier, vol. 110(2), pages 290-308, June.
  6. Yasuyo Hamaguchi & Satoshi Mitani & Tatsuyoshi Saijo, 2003. "Does the Varian Mechanism Work?--Emissions Trading as an Example," International Journal of Business and Economics, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 2(2), pages 85-96, August.
  7. Yan Chen & Robert Gazzale, 2004. "When Does Learning in Games Generate Convergence to Nash Equilibria? The Role of Supermodularity in an Experimental Setting," American Economic Review, American Economic Association, vol. 94(5), pages 1505-1535, December.
  8. Botond Koszegi & Matthew Rabin, 2005. "A Model of Reference-Dependent Preferences," Levine's Bibliography 784828000000000341, UCLA Department of Economics.
  9. Rabin, Matthew, 1993. "Incorporating Fairness into Game Theory and Economics," American Economic Review, American Economic Association, vol. 83(5), pages 1281-1302, December.
  10. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
  11. Danziger, Leif & Schnytzer, Adi, 1991. "Implementing the Lindahl voluntary-exchange mechanism," European Journal of Political Economy, Elsevier, vol. 7(1), pages 55-64, April.
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Cited by:
  1. Charles Figuières & Ngo Van Long & Mabel Tidball, 2013. "The MBR Intertemporal Choice Criterion and Rawls' Just Savings Principle," Working Papers 13-02, LAMETA, Universtiy of Montpellier, revised Feb 2013.

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