Free-riding Incentives Research Articles

Collective PES Contracts Can Motivate Institutional Creation to Conserve Forests: Experimental Evidence

ABSTRACTIncentives are a widely used tool for addressing deforestation and are often implemented as collective contracts. Local institutions are crucial to the solution of collective action problems associated with forest conservation, but we still have little knowledge of how to encourage institutional creation through policy. Since collective contracts do not eliminate freeriding incentives, we argue that their success hinges on their ability to stimulate the creation of institutions for collective action. To test these ideas, we analyze data from an incentivized lab‐in‐the‐field experimental collective action game played with natural resource users in four developing countries. The experiment simulates management of a common forest, and groups were randomly assigned to a conservation incentive payment condition. We observe how much group members attempt to coordinate on the creation of institutional rules and find experimental evidence that an external incentive program can stimulate the endogenous creation of informal institutions.

Political influence on international climate agreements with border carbon adjustment

We study the influence of industrial lobbying on national climate policies and the formation of an international environmental agreement if the coalition countries use border carbon adjustments to protect domestic producers. We find that the effects of this political influence crucially depend on the distribution of carbon tax revenues. If these are transferred to the households, lobbying distorts carbon taxes downwards to reduce the tax burden and does not affect coalition sizes. This leads to higher emissions and lower welfare. By contrast, if tax revenues are given back to the firms, lobbies in the outsider countries favor carbon taxes, whereas lobbies in the coalition countries favor carbon subsidies to raise the international commodity price. This reduces the tax difference and the welfare difference between the countries, which reduces the free-rider incentives. Then, lobbying stabilizes the grand coalition and reduces global emissions compared to a “perfect” world without lobbying if the political influence is sufficiently strong.

The collapse of Kyoto Protocol: An analysis based on Game Theory

Everyone is a stakeholder in environmental issues. Contemporarily, climate change is incrementally imposing threats to human development, making multilateral cooperation necessary to minimise the impacts of climate-related risks. The Kyoto Protocol was a significant internationally binding agreement that aimed to reduce greenhouse gases emissions, whereas its signatories failed to achieve its target to a large extent. This paper analyzes the reason behind the failure of the Kyoto Protocol through a game-theoretic literature. The main factors that contributed to the collapse of the Kyoto Protocol include the complex nature of the environmental issue and strategic interest in the treaty ratification procedure. The global environment is defined as a public good, therefore, each country has a free-rider incentive to take advantage of others’ actions in pollution reduction, which is analyzed through a single prisoners’ dilemma game. When such a game is extended to a repeated prisoners’ dilemma game with an infinite horizon, there is a possibility that nations adopt a cooperative strategy in the long run. Simultaneously, the ultimatum game provides a representation of the treaty negotiation and ratification process, highlighting the importance of fairness and reciprocity of the treaty for its signatories. Potential solutions include trade sanctions, tax on exports, and the measure of cumulative emission has been evaluated at the end of the paper.

Community-based climate adaption: A perspective on the interface between a common pool resource system and an individual-based market transaction system

Because of land privatisation and marketisation in rural areas, community-based adaptation to climate change may face new challenges. A field survey conducted on the Qinghai–Tibetan Plateau (QTP) shows that herders with a grassland collective management system (CMS) suffer higher livestock mortality than those with an individual management system (IMS) during the same extreme climatic events, in contrast to previous research findings. This study seeks to explain this contrast. The results show that although local herders have begun to rely on market-related adaptation strategies to cope with climate change, IMS herders are more inclined to rent-in grassland, while CMS herders are more inclined to purchase fodder. The high-cost grassland renting-in strategy reduces livestock mortality and total household economic loss more effectively than purchasing fodder during snow disasters. An important reason for this is that IMS strengthens market concepts and promotes interaction between herders and external markets, especially the grassland rental market, while CMS continues past grazing traditions and maintains traditional social relationships and collective concepts within the community. CMS herders fail to rent-in grassland due to psychological free-riding incentives and scale mismatch. In the face of repeated climatic disasters, however, CMS herders have also begun to overcome various obstacles to entering the grassland rental market through self-organization and are gradually forming a new pathway of adaptation to climate change.

Being green first: Simultaneous vs. sequential abatement decisions

We investigate the effect of the timing of green technology investment in a polluting duopoly facing environmental regulation. We consider a three-stage game where (i) firms sequentially choose their investment in the first stage, (ii) the regulator sets the optimal emission fee in the second stage, and (iii) the polluting good is produced in the third stage. When free-riding incentives are strong the leader enjoys a first-mover advantage, investing less in abatement than the follower, as in sequential public good games. We also show that sequential investment decisions achieve higher abatement than simultaneous decisions, and identify in which settings such a difference is the largest.

Ethnic diversity and forest commons

The management of forest commons requires coordination within a community and between communities. This coordination is usually challenging given the incentives for free riding. The literature suggests that communities with heterogeneous members, particularly from different ethnic groups, are less effective in commons management and public goods provision. In this paper, we empirically test if forest degradation differs within and between ethnically diverse communities. Using data for the majority of villages in rural Gambia, our first set of results suggest that ethno-linguistic fractionalization within villages correlates with a reduction in forest cover and an increase in forest loss over a period of 15 years. Then, we propose a new approach to assess forest management between heterogeneous communities. Forest units within exclusively shared territory between pairs of neighboring villages are defined by dyadic polygons, which are used to apply dyadic regression methods. In our second set of results, we find evidence suggesting that spaces shared between ethnically distant communities exhibit higher forest cover and lower forest loss. Further analyses suggest that the effect of ethnic distance on reduced forest degradation is present mainly when villages are heterogeneous in other characteristics as well. Our study motivates the identification of relevant spaces for the analysis of competition over local commons, providing a novel approach of potential interest to applications beyond our area of study.

Issue linkage

Issue linkage is often advocated as a powerful mechanism to encourage cooperation on issues where free-riding incentives are significant. The basic idea is to link cooperation on such issues with cooperation on issues that provide (partially) excludable benefits and are therefore less susceptible to free-riding. In this paper, we take a coalition formation approach and study the effects of issue linkage on overall cooperation levels and welfare. We show that, when the linked issues are independent, issue linkage is not necessarily welfare improving; in fact, unless the less critical issue is almost perfectly excludable, issue linkage leads to a welfare loss. By contrast, a generalized enlargement of cooperation and an increase in welfare are obtainable when the linked issues are “complements”. Using concepts from network theory, we further provide insights into the design of cost-effective (minimally connected) linkage architectures when more than two issues are at stake.

Bail-Ins and Bailouts: Incentives, Connectivity, and Systemic Stability

This paper endogenizes intervention in financial crises as the strategic negotiation between a regulator and creditors of distressed banks. Incentives for banks to contribute to a voluntary bail-in arise from their exposure to financial contagion. In equilibrium, a bail-in is possible only if the regulator’s threat to not bail out insolvent banks is credible. Contrary to models without intervention or with government bailouts only, sparse networks enhance welfare for two main reasons: they improve the credibility of the regulator’s no-bailout threat for large shocks, and they reduce free-riding incentives among bail-in contributors when the threat is credible.

River Chief System, Emission Abatement, and Firms’ Profits: Evidence from China’s Polluting Firms

This paper studies the firm-level impact of the river chief system (RCS), which is a decentralized policy in China for water protection, by investigating polluting firms’ emission abatement and the net operating profits. We have four main findings. First, on average, the RCS significantly reduced firm-level COD emissions by 3.7 percent, which was mainly caused by the emission abatement of firms in heavily polluting industries, non-state-owned firms, and firms in the eastern provinces. On the other hand, the RCS also significantly increased polluting firms’ profit by 3.1 percent, which was mainly caused by heavily polluting firms. Second, different regions adopted different strategies for pollution abatement, exhibiting a pattern consistent with the “pollution paradise” assumption in the central and western provinces. Third, polluting firms at provincial boundaries did not reduce their COD emissions, while polluting firms in the interior significantly reduced their emissions by 5.6 percent, indicating the strong free-riding incentive of local governments. Fourth, the increase in the profits of heavily polluting industries was mainly caused by the significant increase in market concentration and a possible transfer of the negative shock from the RCS along the production line. All results were also robust for firm-level NH3-N emissions. This paper provides new and insightful implications for policymaking for environmental protection.

Do Major-Power Interventions Encourage the Onset of Civil Conflict? A Structural Analysis

What is the impact of major-power intervention on civil-war onset? A considerable hurdle to answering this question is gauging expectations about future intervention on the eve of conflict. We tackle this challenge by developing a unified theoretical and empirical model of civil-war onset and subsequent intervention. Our model allows for strategic interdependence among interveners, and our empirical strategy enables estimation of intervention expectations from equilibrium behavior. We fit the model to civil war and intervention data from the second half of the twentieth century and find that major-power intervention is primarily characterized by strategic complementarities—for example, cost sharing among allies or competition for control among rivals—rather than free-riding incentives. Through counterfactual experiments, we show that commitments to decreased intervention would raise the risk of civil war worldwide, whereas increased intervention would have little effect. Our results suggest that coordination among major powers is maximally deterring civil conflict.

Active First Movers vs. Late Free-Riders? An Empirical Analysis of UN PRI Signatories’ Commitment

Joining voluntary thematic initiatives can be a means for firms to legitimate their business activities. However, a lack of review mechanisms could create incentives for free-riding. This might lead to a lower commitment to the initiative’s principles, and endanger its credibility and its members’ legitimacy benefits. Whether members of voluntary initiatives take advantage of the opportunity to free-ride has not been analyzed empirically so far. To fill this research gap, we investigate from an institutional theory perspective the actual implementation behavior of publicly listed signatories of the United Nations Principles for Responsible Investment (UN PRI) in a difference-in-differences and an event study setting. Our empirical results show that, after signing, UN PRI signatories integrate environmental, social, and governance (ESG) criteria in their business activities significantly more than matched non-signatories from the financial sector, indicating the commitment of the signatories to the UN PRI in general. However, while the initial members show a high commitment to the initiative’s principles by increasing their ESG integration performance substantially, new members signing at a later stage of the initiative perform considerably less, and thus undermine the UN PRI’s credibility. We derive implications for voluntary thematic initiatives to avoid such a development.

Elite Status, Market Linkages, and Contributions to Collective Goods: Evidence from a Survey and Public Goods Experiments

Cooperation is particularly important in the management of common resources where the user rights of individuals are collective. We used a one-shot public goods experiment to construct a measure of social capital, based on ‘multilateral’ cooperative behaviour, where each participant had free-riding incentives. This study was conducted in four rural villages of Odisha in India in the course of a project studying irrigation. Participants were male farmers from different social groups. Combining survey data with the artefactual field experiments, we examined how an individual’s willingness to contribute to the collective good was affected by social and economic characteristics, and political connections to the local administrative unit. The results suggest interesting differences in cooperation: in the less remote villages, farmers were less cooperative on average compared to farmers living in more remote villages. Furthermore, we found that wealthy and influential farmers invested less in the provision of a public good, reducing the likelihood of successful collective action. The findings are relevant both to the ‘collective action in the commons’ discourse and the literature on using experimental methods to deal with an individual’s true preferences for a public good.

The Difficulty of Easy Projects

We consider binary private contributions to public good projects that succeed when the number of contributors exceeds a threshold. We show that for standard distributions of contribution costs, valuable threshold public good projects are more likely to succeed when they require more contributors. Raising the success threshold reduces free-riding incentives, and this strategic effect dominates the direct effect. Common intuition that easier projects are more likely to succeed only holds for cost distributions with right tails fatter than Cauchy. Our results suggest government grants can reduce the likelihood that valuable threshold public good projects succeed. (JEL D71, H41, H81)

No Such Thing as a Free-Rider? Understanding Drivers of Childhood and Adult Vaccination through a Multicountry Discrete Choice Experiment.

Increased vaccine hesitancy and refusal negatively affects vaccine uptake, leading to the reemergence of vaccine preventable diseases. We aim to quantify the relative importance of factors people consider when making vaccine decisions for themselves, or for their child, with specific attention for underlying motives arising from context, such as required effort (accessibility) and opportunism (free riding on herd immunity). We documented attitudes towards vaccination and performed a discrete choice experiment in 4802 respondents in The United Kingdom, France and Belgium, eliciting preferences for six attributes: (1) vaccine effectiveness, (2) vaccine preventable disease burden, (3) vaccine accessibility in terms of copayment, vaccinator and administrative requirements, (4) frequency of mild vaccine-related side-effects, (5) vaccination coverage in the country’s population and (6) local vaccination coverage in personal networks. We distinguished adults deciding on vaccination for themselves from parents deciding for their youngest child. While all attributes were found to be significant, vaccine effectiveness and accessibility stood out in all (sub)samples, followed by vaccine preventable disease burden. We confirmed that people attach more value to severity of disease compared to its frequency, and discovered that peer influence dominates free-rider motives, especially for the vaccination of children. These behavioral data are insightful for policy and are essential to parameterize dynamic vaccination behavior in simulation models. In contrast to what most game theoretical models assume, social norms dominate free-rider incentives. Policy-makers and healthcare workers should actively communicate on high vaccination coverage, and draw attention to the effectiveness of vaccines while optimizing their practical accessibility.

Entry Deterrence and Free Riding in License Auctions: Incumbent Heterogeneity and Monotonicity

Abstract We examine free riding for entry deterrence in license auctions with heterogeneous incumbents. We establish the monotonicity of randomized preemptive bidding equilibria: an incumbent with a higher entry-loss rate has greater free-riding incentive, choosing a lower deterring probability. We then identify conditions for the existence of a series of fully or partially participating equilibria such that two or more incumbents with bounded heterogeneity in their entry-loss rates participate in randomized preemptive bidding. As an application, we examine a simple case of a bipartite group of participating incumbents consisting of one “leader” and many “followers”. We show that the policy of limiting the leader’s participation (set-asides for entrants, limiting participation of incumbents with excessive market shares, etc.) may or may not increase entry probability.

Regulators and environmental groups: better together or apart?

AbstractThis paper examines green alliances between environmental groups (EGs) and polluting firms, which have become more common in the last decades, and analyzes how they affect policy design. We first show that the activities of regulators and EGs are strategic substitutes, giving rise to free-riding incentives on both agents. Nonetheless, the presence of the EG yields smaller welfare benefits when firms are subject to regulation than when they are not. In addition, the introduction of environmental policy yields large welfare gains when the EG is absent but small benefits when the EG is already present.

Strategic Environmental Policy and the Mobility of Firms

The loss of international competitiveness of domestic industries remains a key obstacle to the implementation of effective carbon prices in a world without harmonized climate policies. We analyze countries’ noncooperative choices of emissions taxes under imperfect competition and mobile polluting firms. In our general equilibrium setup with trade, wage effects prevent all firms from locating in the same country. While under local or no pollution countries achieve the first-best, under transboundary pollution taxes are inefficiently low and lower than under autarky where only the “standard” free-riding incentive distorts emissions taxes. This effect is more pronounced when polluting firms are mobile.

Group size increases inequality in cooperative behaviour.

In cooperatively breeding species where rearing effort is shared among multiple group members, increases in group size typically reduce average per capita contributions to offspring care by all group members (load-lightening) but it is not known how changes in group size affect the distribution of workload among group members. The socioeconomic collective action theory suggests that, in larger groups, the incentives for free riding are stronger, leading to greater inequalities in work division among group members. Here, we use the Gini index to measure inequality at the group level in the contributions of helpers to three different cooperative behaviours (babysitting, pup-provisioning and raised guarding) in groups of varying size in wild Kalahari meerkats (Suricata suricatta). In larger groups, inequality in helpers' contributions to cooperative activities and the frequency of free riding both increased. Elevated levels of inequality were generated partly as a result of increased differences in contributions to cooperative activities between helpers in different sex and age categories in larger groups. After controlling for the positive effect of group size on total provisioning, increasing levels of inequality in contributions were associated with reductions in total pup-provisioning conducted by the group. Reductions in total pup-provisioning were, in turn, associated with reductions in the growth and survival of pups (but pup growth and survival were not directly affected by inequality in provisioning). Our results support the prediction of collective action theory described above and show how the Gini index can be used to investigate the distribution of cooperative behaviour within the group.

Are there similarities between the Corona and the climate crisis?

In this short paper, I look back at the early stages of the Corona crisis, around early February 2020, and compare the situation with the climate crisis. Although these two problems unfold on a completely different timescale (weeks in the case of Corona, decades in the case of climate change), I find some rather striking similarities between these two problems, related with issues such as uncertainty, free-rider incentives, and disincentives of politicians to adequately address the respective issue with early, farsighted and possibly harsh policy measures. I then argue that for complex problems with certain characteristics, it may be necessary to establish novel political decision procedures that sidestep the normal, day-to-day political proceedings. These would be procedures that actively involve experts, and lower the involvement of political parties as far as possible to minimize the decision-makers’ disincentives.

Entry Deterrence and Free Riding in License Auctions: Incumbent Heterogeneity and Monotonicity

We examine free riding for entry deterrence in license auctions with heterogeneous incumbents. We establish the monotonicity of randomized preemptive bidding equilibria: an incumbent with a higher entry-loss rate has greater free-riding incentive, choosing a lower deterring probability. We then identify conditions for the existence of a series of fully or partially participating equilibria such that two or more incumbents with bounded heterogeneity in their entry-loss rates participate in randomized preemptive bidding. As an application, we examine a simple case of a bipartite group of participating incumbents consisting of one “leader” and many “followers”. We show that the policy of limiting the leader’s participation (set-asides for entrants, limiting participation of incumbents with excessive market shares, etc.) may or may not increase entry probability.