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Social Choice and Welfare

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01-01-2015

Community projects: an experimental analysis of a fair implementation process

Authors: Simona Cicognani, Anna D’Ambrosio, Werner Güth, Simone Pfuderer, Matteo Ploner

Published in: Social Choice and Welfare | Issue 1/2015

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Abstract

We define and experimentally test a public provision mechanism that meets three basic ethical requirements and allows community members to influence, via monetary bids, which of several projects is implemented. For each project, participants are assigned personal values, which can be positive or negative. We provide either public or private information about personal values. This produces two distinct public provision games, which are experimentally implemented and analyzed for various projects. In spite of the complex experimental task, participants do not rely on bidding their own personal values as an obvious simple heuristic whose general acceptance would result in fair and efficient outcomes. Rather, they rely on strategic underbidding. Although underbidding is affected by projects’ characteristics, the provision mechanism mostly leads to the implementation of the most efficient project.

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In the context of the NIMBY literature, Kunreuther and Portney (1991) propose a similar approach to guide decision making for the siting of noxious facilities.

Costs could be negative, e.g., when implementation is generating revenues rather than costs. However, this possibility is neglected here.

Requirement 3 postulates equal treatment of all parties according to bids that are objectively and interpersonally observable and verifiable. As such, it defines an aspect of the game form and not of actual earnings. As pointed out by a reviewer, there may be other specifications which, however, do not capture the basic principle of democratic representation where all votes are weighted equally.

Personal values should not be interpreted as endowments but as benefits/disbenefits from implementing a certain project, irrespective of the reasons that led to this valuation.

The same applies to democratic election rules and, more generally, to legally codified mechanisms which must be applicable across the board, i.e., even to the usual “ill-defined cases.”

Overbidding may result in a loss of pocket-money in the experiment and in a disadvantageous final allocation for those overbidding relative to those not overbidding. Moreover, a participant who decides to overbid will leave the overall benefit to society unchanged and only reduce her own payoff in favor of the others. This makes overbidding unlikely also for individuals endowed with conventional social preference.

A project is efficient according to personal values when the sum of the personal values for some \(S\) at least covers its cost \(C(S)\).

This, of course, applies also to mechanisms which are dominance solvable. However, more often than not, such mechanisms are impossible (see Güth 2011).

We thank an anonymous reviewer for pointing out this issue.

The same outcome would be achieved if all participants underbid or overbid by the same amount; however, this seems rather unlikely, even when personal values are commonly known and quite unimaginable when they are not.

Exceptional cases are when personal values add up to the costs.

The same logic applies to participants with negative personal values who may try to increase their payoff by posting a negative bid smaller than their personal value, provided, of course, that the other bids cover the costs and compensate her negative bid.

In experimental bargaining games, asymmetries in payoffs often lead to bargaining failures (Kagel et al. 1996; Schmitt 2004). While in the bargaining literature this failure may be attributed to conflicting fairness norms, this is not the case in our game, where the only salient fair and efficient behavior is bidding one’s personal value, even if it is negative.

A series of Wilcoxon Rank Sum tests reveals that rounds based on the same prospect can be pooled together.

To warrant independence of observations, the tests are performed employing average values at the individual level.

Given that participants did not receive any feedback during the experiment, groups do not affect choices over the course of the experiment. Consequently, a better measure of project implementation is obtained by taking into account all possible combinations of bids for a given project in a given round and not only the bids in each group of three participants. This implies that, in each round and for each project, \(10^3\) and \(9^3\) triplets of bids are obtained in the public and private information conditions, respectively.

To warrant independence of observations, we computed the frequency of implementation of the socially most desirable projects at the group level for both information conditions. The difference in the central tendencies of the distributions thus computed was then tested with the support of a non-parametric test. The same procedure was followed for the other tests reported in this section.

The dependent variable \(Rel.dev_i=\frac{b_i-v_i}{|v_i|}\times 100\) cannot be computed for those subjects with a personal value equal to zero. Accordingly, the regression analysis is conducted on 5,757 out of 5,985 available observations.

To measure the underbidding margin, we compute the relative underbid which, when jointly implemented, generates nil surplus. In Prospect 2, the average underbidding margin across projects is equal to 0.339, while for other prospects the same measure is always smaller than 0.250.

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Title: Community projects: an experimental analysis of a fair implementation process
Authors: Simona Cicognani
Anna D’Ambrosio
Werner Güth
Simone Pfuderer
Matteo Ploner
Publication date: 01-01-2015
Publisher: Springer Berlin Heidelberg
Published in: Social Choice and Welfare / Issue 1/2015
Print ISSN: 0176-1714
Electronic ISSN: 1432-217X
DOI: https://doi.org/10.1007/s00355-014-0822-y

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