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The Good of the Few: Reciprocity and the Provision of a Public Bad

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Abstract

People trade favors when doing so is efficiency-enhancing; will they also trade favors when it reduces efficiency, as it may in cases of corruption, nepotism, or political logrolling? We introduce the “Stakeholder Public Bad†game to model these scenarios. In each round, common fund contributions increase earnings of one person (the “Stakeholderâ€) but reduce earnings of the rest of the group so much that overall efficiency is reduced. The Stakeholder position rotates through group members. The promise of high Stakeholder rewards provides a lever for reciprocal actions: if one person increases another’s payoff by contributing when the other is Stakeholder, he or she may be rewarded later with a reciprocal gift when he or she becomes Stakeholder. In a lab experiment, we find that subjects in the Stakeholder role willingly sacrifice the good of the group. Most importantly, we find strong evidence of favor trading: Non-Stakeholders contribute and receive later reciprocal rewards for doing so. This favor-trading is only possible when agents know others’ roles and payoffs; thus, in this setting, information provision is anti-social. In our experiment, favor-trading does not significantly increase public bad provision, but such an increase could occur with a different population or parameters.

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Bibliographic Info

Paper provided by Department of Economics, Williams College in its series Department of Economics Working Papers with number 2014-03.

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Length: 32 pages
Date of creation: Jan 2012
Date of revision: May 2014
Handle: RePEc:wil:wileco:2014-03

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Keywords: reciprocity; public bad; logrolling; social preferences; externalities; public good;

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Cited by:
  1. Nicholas Wilson, 2012. "Shock to the System: Prevention of Mother-to-Child Transmission of HIV and Child Mortality," Department of Economics Working Papers 2012-03, Department of Economics, Williams College, revised Jul 2013.
  2. Delaney, Jason & Jacobson, Sarah, 2014. "Those outsiders: How downstream externalities affect public good provision," Journal of Environmental Economics and Management, Elsevier, vol. 67(3), pages 340-352.
  3. Werner Güth & Anastasios Koukoumelis & M. Vittoria Levati & Matteo Ploner, 2013. "Providing negative cost public projects under a fair mechanism: An experimental analysis," Jena Economic Research Papers 2013-021, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.

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