House Money Effects in Public Good Experiments

Abstract

Are decisions in economics experiments distorted because the money subjects risk comes from the experimenter rather than their own pockets? There is some evidence that people receiving small, one time “windfall gains” have a higher marginal propensity to consume them, and when doing so, exhibit greater risk-seeking behaviour. This has been found in individual decision making experiments when anticipated wealth effects have been controlled, and labelled the “house money effect.” In public good experiments, house money effects could be driving the high levels of voluntary contributions commonly observed. This possibility is tested by comparing VCM contribution rates when subjects supply their own endowments with those when endowments are provided, while holding constant the distribution of promised earnings. No evidence of house money effects is found, suggesting that use of “free” initial money endowments does not distort subsequent contributions in VCM environments.