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State or Nature: Formal vs. Informal Sanctioning in a Voluntary Contribution Game

State or Nature: Formal vs. Informal Sanctioning in a Voluntary Contribution Game. Kenju Kamei* Louis Putterman* Jean-Robert Tyran** * Brown University ** University of Copenhagen University of Vienna. Why State or Nature?.

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State or Nature: Formal vs. Informal Sanctioning in a Voluntary Contribution Game

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  1. State or Nature:Formal vs. Informal Sanctioning in a Voluntary Contribution Game Kenju Kamei* Louis Putterman* Jean-Robert Tyran** * Brown University ** University of Copenhagen University of Vienna

  2. Why State or Nature? • Hobbes (1588-1679) and Locke (1632-1704) contrasted a state of nature ruled only by self-interest, with civilized life under a commonwealth, state, or civil government. • Hobbes described the state’s relation to individuals in terms of “the introduction of that restraint upon themselves …[to] tie them by fear of punishment to the performance of their covenants.”

  3. Locke argued that the state is necessary due to the unreliability of informal sanctions and the problem of counter-punishment: … the irregular and uncertain exercise of the power every man has of punishing the transgressions of others, make them take sanctuary under the established laws of government … It is this makes them so willingly give up every one his single power of punishing, to be exercised by such alone, as shall be appointed to it amongst them; and by such rules as the community, or those authorized by them to that purpose, shall agree on. (§. 127.)

  4. We asked ourselves: If putting the power to punish in the hands of a central authority is the hallmark of civilization, why have we experimental economists been so focused on informal (horizontal, decentralized) rather than formal (vertical, centralized) sanctioning systems in our research of the past dozen years?

  5. In Putterman, Tyran and Kamei (PTK, 2010) we began to study how groups would structure formal sanction schemes if given the opportunity. • In the present paper, KPT (and also in Markussen, Putterman and Tyran), we continue this research program by conducting experiments in which subjects can not only construct formal sanction schemes but also decide by voting whether to use informal sanctions or formal ones. • By “State or Nature” we mean “Formal or Informal sanctions.”

  6. Conceptual Comparison of FS vs. IS

  7. Conceptual Comparison of FS vs. IS (cont.)

  8. Real World Applications • There are “local public goods” problems on the borderline of where state action can reach in a cost-effective fashion (for example, maintenance of a village woodlot in a developing country)—see Ostrom Nobel address (AER 2010). • Organizations can choose between more formal rules vs. more voluntary forms of cooperation (example: adopt a strict dues system or ask supporters to contribute “whatever they feel they can”). • Other applications in firms, etc.

  9. Note: some real world settings mix formal and informal sanctions. By treating formal and informal sanctions as substitutes rather than complements, we abstract from this. Kube and Traxler (2010) study the combination of a non-deterrent formal sanction and informal sanctions (in exogenously imposed treatments).

  10. Experimental framework • Our basic framework is the voluntary contribution mechanism (VCM) or public goods game (PGG). • For simplicity, we use a linear VCM played by partner groups in which endowments are equal. • There are a known finite number of repetitions, for clarity of theoretical predictions. • Formal or informal sanction schemes are added mainly endogenously (by vote), but sometimes exogenously.

  11. Our main focus is on whether subjects display a preference for formalor for informal sanction schemes when given a choice. • We let them make these choices repeatedly so that we can observe any effects of experience and/or learning. • In 6-Vote treatments, voting begins at the outset; in 3-Vote treatments, subjects undergo play with exogenous rules first, so that each vote (once votes begin) is by informed / experienced subjects. We compare results to test the robustness of our findings.

  12. For treatments in which subjects are first exposed exogenously to sanctioning schemes, we study both orders (formalinformal; informalformal) to check for robustness. • The costliness of using a formal sanction scheme (“having a state”) varies across treatments. • We have a baseline no sanctions treatment and we added as a later check a fully exogenous IS treatment to investigate whether endogenous choice of scheme has an effect in its own right.

  13. Informal Sanctions (IS) • An informal sanction scheme in a VCM (PGG) means each period has two stages: (1) a contribution stage, (2) after learning others’ contributions, each subject can punish others at a cost to him/herself. • We have partner groups, finite repetition, scrambling of IDs (no indiv. reputation), and a fixed ratio of cost to punisher/versus cost to person targeted, as in Sefton, Shupp and Walker (2007), Carpenter (2007), Page, Putterman and Unel (2005), Nikiforakis and Normann (2008) and other papers. • We use cost ratio 1:4, giving a relatively high punishment effectiveness.

  14. Formal Sanctions (FS) • Under a formal sanction scheme, an individual suffers an automatic earnings deduction for one or the other allocation decision. (In future work, we may add some uncertainty about punishment and also allow for erroneous sanctioning.) • If contributing to one’s private account is what is penalized, and at a high enough rate, it becomes privately optimal to contribute only to the group account, hence the social dilemma vanishes (it’s 1st best to contribute full endowment).

  15. Formal Sanctions (FS) • However, we let subjects vote on (a) whether allocating to private accounts or to the group account is subject to sanction, (b) what the sanction rate is (it could be set at a low, “non-deterrent” level). • Why? FS with endogenous terms is more comparable to IS in that subjects might choose an inefficient sanction scheme (punish the wrong action, or choose a non-deterrent sanction rate) due to confusion, ideological opposition, cost-cutting, or other factors. As in PTK (2010), we wanted to study how subjects vote and what explains any variation in voting. • We give them no clue what they should do. The instructions are as neutral and non-interpretive as possible.

  16. Formal Sanctions (FS) • Money lost to penalties is not redistributed (as is also true of informal sanctions in our own and most experiments ). • All group members pay a small variable cost whenever a penalty is imposed (we set the ratio of var. cost of punishing, shared among the non-punished members, versus cost to the punished member to 1:4, paralleling our IS condition). • Half the treatments impose a fixed cost to use the FS scheme equal to ¼ of the per period endowment (i.e., 5 points fixed cost vs. per period endowment of 20 points).

  17. Formal Sanctions (FS) • The fixed cost represents a fixed administrative cost of establishing and sustaining “a state” or formal structure, such as a police force, courts, prisons, etc., and is described in the instructions as “an administrative cost of having a fine scheme in place.” • In the other half of treatments, there is no fixed cost of using the formal sanctions scheme.

  18. A Few More Details… • Groups have 5 members • MPCR = 0.4 • There are 6 phases of 4 periods per phase • Each phase is preceded by a vote between IS and FS in 6-vote treatments. • In 3-vote treatments, phase 1 is played with no sanctions, phases 2 and 3 with IS and FS in one or the other order, then subjects vote for either IS or FS for each of phases 4, 5 and 6. Earning from Private Account Earning from Public Account

  19. IQ test and questionnaire about political preference additional round 1.5 CS CS CS NS IS (FS) FS (IS) Timeline: 3-Vote Treatment 4 8 12 16 20 24 Periods IQ test and questionnaire about political preference additional round 0.5 Timeline: 6-Vote Treatment NS CS CS CS CS CS CS 4 8 12 16 20 24 0 Periods NS: No Sanctions FS: Formal Sanctions IS: Informal Sanctions CS: Chosen sanctions scheme : Indicates a vote on method of sanction

  20. Subjects were drawn from the general undergraduate population at Brown University and interacted via computer in a computer lab • The experiment was programmed in Z-Tree • An incentivized conditional contribution task (as in Fischbacher-Gächter-Fehr and Fischbacher-Gächter) preceded the main part of the experiment. • An incentivized intelligence test and survey questions on political orientation followed the main part of the experiment. • The overall experiment took just under 2 hours; subjects earned an average of $31.58 including a $5 show-up fee. • There were a total of 305 subjects in 8 treatments including a baseline treatment with 6 phases, 24 periods, no sanctions, and no voting.

  21. Notes: NS = no sanctions, FS = formal sanctions, IS = informal sanctions. The experiment as a whole consisted of 16 sessions in which 61 groups consisting of 305 individual subjects participated. There were a total of 183 group votes on the use of FS versus IS, with 915 individual votes cast.

  22. Theoretical Predictions • Predictions are straightforward if one assumes common knowledge of own-payoff maximizing behavior and unbounded rationality. • Contributions to the group account, and informal punishment when available, are always zero unless there is a sanction of sufficient strength for allocating endowment to one’s private account, in which case all allocations go to the group accounts.

  23. (Theoretical Predictions, cont.) • Since the symmetric equilibrium with full contributions entails higher earnings for each than the symmetric equilibrium with zero contributions, voting to sanction contributing to the private accounts and to set a high penalty level is always a weakly dominant strategy (if fixed cost modest). • We can assume subjects vote accordingly, for example by invoking trembling hand perfection.

  24. (Theoretical Predictions, cont.) Having three voting stages* may complicate choice-theoretic predictions, so Markussen, Putterman & Tyran are studying treatments with only one voting stage, whereas the present paper allows testing predictions about what formal sanctions schemes subjects construct, at the cost of this added complexity. * when FS chosen, i.e. 1. Formal/informal; 2. Public/private; 3. Penalty rate.

  25. Behavioral Predictions • Informal sanctions will work better than standard theory predicts because people do punish, due to negative reciprocity, inequity aversion, etc. • Given this, subjects will choose between formal and informal sanctions on the basis of cost (e.g., vote against using formal sanctions when there’s a large fixed cost). • The effectiveness of informal sanctions and of non-deterrent formal sanctions may be enhanced by the fact of being chosen by vote (cf. Tyran & Feld, 2006; Dal Bó, Foster, Putterman, 2010; Sutter, Haigner & Kocher, 2010).

  26. However, beware of perverse punishment … • We know high contributors get punished also (Ostrom, Walker & Gardiner, 1992; Cinyabuguma, Page & Putterman, 2006; Herrmann, Thöni & Gächter, 2008) – a phenomenon probably related to counter-punishment (Nikiforakis, 2008; Denant-Boemont, Masclet & Noussair, 2007).

  27. Main Results 1. Which sanctions scheme do groups prefer? Most groups choose informal over formal sanctions when the latter entail a fixed cost, and most groups choose formal over informal sanctions when they do not. Note: This and other results hold in both 6-Vote and 3-Vote treatments. (6-Vote subjects act in vote 1, Phase 1, like their more experienced 3-Vote counterparts in vote 1, Phase 4…as if they predict well!)

  28. Choice of informal or formal sanctions (vote outcomes) in 3-vote and 6-vote treatments with and without administrative cost of FS

  29. Main Results 2. What is sanctioned and at what rate, when FS is chosen? Groups almost always select to penalize contributing to the private (not public) accounts, and the sanction rate is usually but not always “deterrent” (1.2 or 0.8) rather than non-deterrent (0.4 or 0.0).

  30. Note: There are indications of a tendency to choose a higher fine rate in later periods of the two 6-Vote treatments (learning?)(based on regression analysis of the groups that always chose FS in those treatments).

  31. Main Results 3. How does IS perform when chosen? IS works much better than it “should” according to standard theory, usually achieving contributions and efficiencies not significantly different from those with formal sanctions and almost always signicantly higher than with NS.

  32. Average contribution, all treatments

  33. (a) 6-N treatment (b) 6-C treatment Average earnings under IS and FS in the two 6-Vote treatments (N = no administrative cost, C = administrative cost)

  34. Main Results 4. How much and what punishing occurs when IS is chosen? The effectiveness of IS is associated with the fact that many subjects do incur the cost of punishing and most punishment is given to low contributors.

  35. We identify as “perverse” any punishment that is given to a group member who contributed more than the median amount during the period in question.

  36. Main Results 5. Do contributions under FS depend on the sanction rate in the manner predicted by standard theory? Not entirely.Average contribution under FS varies with the sanction level in a semi-continuous fashion, including:

  37. (contributions under formal sanctions) - more at fine of 1.2 than at fine of 0.8 although both should induce contribution of full endowment - more at fine of 0.4 than at fine of 0.0 although 0.4 is a “non-deterrent sanction” that should not affect contribution for uniformly rational, self-interested subjects with common knowledge - effectiveness of voted non-deterrent sanction of 0.4 is the most important departure from standard prediction

  38. Contributions under formal scheme by sanction rate

  39. 6. Does IS perform better when chosen than when assigned endogenously? Yes. The average efficiency associated with informal sanctions is higher in Phase 2 of Treatment 6-C groups that chose IS than in “exogenous IS comparison treatment” in which IS is assigned to the subjects by the experimenters. The same applies in a parallel comparison with an exogenous IS treatment in Markussen et al.

  40. Endogenous IS (4 groups) vs. Exogenous IS (6 groups)

  41. However, the differences just shown are not statistically significant (based on M-W tests with group-level observations) in our study, whereas they are in the Markussen et al. study.

  42. Brief, tentative conclusions • As in PTK, subjects can construct efficient formal sanctions schemes. • But standard theory incorrectly predicts that deterrent formal sanctions are always preferred to informal sanctions. • The prediction errs because subjects in fact have the capacity to achieve informal cooperation if offered the power to punish one another. • That power is mainly used to punish free riders. • Given actual behaviors under each scheme, subjects sensibly choose between formal and informal sanctions based on their relative costs.

  43. Caveat • We do not claim to have fully addressed IS’s potential “Achilles heal”: retaliation.* This is because our IS treatment does not offer maximum opportunities for counter-punishment. In future research we hope to investigate how IS compares with FS when individuals are able to learn who punished them and to punish back. * See Nikiforakis (2008), “Punishment & Counter-Punishment: Can we still govern ourselves?”; also Denant-Boemont, Masclet, Noussair

  44. Thank you.

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