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Those Outsiders: How Downstream Externalities Affect Public Good Provision

  • Sarah Jacobson

    (Williams College)

  • Jason Delaney

    (School of Business Administration, Georgia Gwinnett College)

Some policy problems pit the interests of one group against those of another group. One group may, for example, determine the provision of a project (such as a power plant or a dam) that benefits group members but has downstream externalities that hurt people outside the group. We introduce a model of projects with such asymmetries. In-group members may contribute to a common fund that benefits them as a public good. In the model, benefits from the project may or may not vary within the group. Project provision has negative downstream externalities: common fund contributions hurt agents outside the in-group (“Outsiders”) rendering common fund contributions anti-social overall. Many models of social preferences predict that such externalities should reduce or eliminate project provision, although conditional cooperation or a preference for in-group members may counteract this effect. We test this model with a lab experiment. With homogeneous in-group benefits, the presence of negative downstream externalities reduces contribution levels by nearly half. We introduce a rotating high-return position that allows subjects to trade favors. Contributions diminish only slightly with the introduction of the negative externality and reciprocal giving occurs whether or not Outsiders are present.

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Paper provided by Department of Economics, Williams College in its series Department of Economics Working Papers with number 2013-09.

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Length: 37 pages
Date of creation: Sep 2013
Date of revision:
Handle: RePEc:wil:wileco:2013-09
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