Free-riding Incentives Research Articles

A Core-Selecting Auction for Portfolio’s Packages

We introduce the local-global approach for a divisible portfolio, and we perform an equilibrium analysis for two variants of core-selecting auctions. Our main novelty is extending the Nearest-VCG pricing rule in a dynamic two-round setup, mitigating bidders' free-riding incentives and further reducing the sellers' costs. The two-round setup admits an information-revelation mechanism that may offset the winner's curse, and it is in accord with the existing iterative procedure of combinatorial auctions. With portfolio trading becoming an increasingly important part of investment strategies, our mechanism contributes to increasing interest in portfolio auction protocols.

The Effects of Joint Audits on Audit Quality and Audit Costs: A Game-theoretical Explanation for Contradictory Empirical Results

We analyze how auditor expertise and the auditors’ (dis)similarity affect audit quality and audit costs in a joint audit (JA) setting. We model both harmful free-riding incentives and a beneficial synergy effect between auditors. We find that audit quality is high and audit costs are low if both auditors have similarly high expertise. Free riding of one auditor occurs most likely if the auditors are dissimilar. In such a JA situation, allocating more of the audit work to the auditor with high expertise can increase audit quality and decrease audit costs. However, an imbalance in the allocation of the audit work can be harmful if both auditors have similar expertise. We show that JAs can lead to higher audit quality and lower audit costs than single audits (SAs) when synergy effects are sufficiently high. In contrast, low synergy effects (i.e., due to rivalry) can lead to coordination difficulties in JAs and result in lower audit quality and higher costs than SAs. Our game-theoretical analysis provides insights into the effects of institutional parameters like a mandated allocation of the audit work and a proportional litigation rule on the JA outcomes. Our findings thus can help to prevent unintended consequences from a mandatory JA regulation.

Examining the Impact of Electoral Competition and Endogenous Lobby Formation on Equilibrium Policy Platforms

Abstract This paper formulates a mathematical model that combines the dynamics of interest group formation with electoral politics, involving office-seeking and corrupt political candidates and voting population with well-defined policy as well as ideological preferences. The analysis provides several interesting insights into the factors affecting lobby membership, free-riding incentives of citizen-voters and aggregate monetary donations garnered by lobby groups. Besides this, the paper also explores the impact of the formation of distinct lobby groups, the presence of swing voters and the corrupt practices or financial embezzlement on the equilibrium policy choice of electoral contenders. The findings reveal that more honest spending of campaign donations by electoral contenders reduces both the size of the lobby (or membership) as well as aggregate campaign contributions in equilibrium. In contrast, a rise in the fixed cost of organization is found to augment lobby membership along with the total amount of campaign contributions. In addition, a reduction in the level of electoral uncertainty as well as a rise in the ideological or swing voter density is found to increase the effectiveness of campaign contributions in raising an electoral candidate’s perceived popularity and, therefore, a smaller lobby group with lower aggregate donations is deemed as sufficient in influencing electoral outcomes. Moreover, the results indicate that a lower utility difference derived by the citizen-voters when comparing the two electoral candidate’s policy choices translates into smaller dispersion of the voters’ ideological bias, and consequently results in an increase in the size of lobby groups and their corresponding aggregate donations. As regards the choice of equilibrium policy, evidence of full policy convergence is not found in the case when citizen-voters of the two groups have separable preferences. In addition, policy equilibrium for a more realistic case in which the two policy platforms exhibit strategic interaction by reacting to each other has also been estimated with the help of simulations. Finally, this paper helps in categorically deciphering the influence of the median voter effect (or the centripetal force) and the distinct centrifugal forces in the form of lobbying effect, swing voter effect and the financial embezzlement effect on the equilibrium policy choice by employing different parametric specifications of the model.

A simple dynamic climate cooperation model

We introduce a novel framework for analyzing coalition formation, applied to climate cooperation. Our model allows for multiple rounds of negotiations and is able to explain the formation of large coalitions. The incentive of each coalition member to join and subsequently to sign a long-term contract is to prevent inefficient delay that arises as soon as a single country deviates. This undermines the free-rider incentive that destabilizes large coalitions in static coalition formation games. The equilibrium coalition size is then determined by a “threshold effect” due to which deviations of coalition members become unprofitable for sufficiently large coalitions.

Organ donation with vouchers

The ever-increasing shortage of organs for transplantation has motivated many innovative policies to promote the supply of organs. This paper proposes and analyzes a general class of deceased organ allocation policies that assign priority on organ waiting lists to voucher holders to promote deceased donor registration. Priority vouchers can be obtained by self-registering for donation or through family inheritance. In an overlapping generations framework, we find that extending the donor priority benefits to future generations can improve the aggregate donation rate and social welfare. In particular, giving higher priority to voucher inheritors who register for donation is always beneficial regardless of the levels of population growth and care for future generations. By contrast, the efficacy of granting priority to nondonors with inherited vouchers depends on these two sociodemographic factors because of potential free-riding incentives.

Self-reliance crowds out group cooperation and increases wealth inequality

Humans establish public goods to provide for shared needs like safety or healthcare. Yet, public goods rely on cooperation which can break down because of free-riding incentives. Previous research extensively investigated how groups solve this free-rider problem but ignored another challenge to public goods provision. Namely, some individuals do not need public goods to solve the problems they share with others. We investigate how such self-reliance influences cooperation by confronting groups in a laboratory experiment with a safety problem that could be solved either cooperatively or individually. We show that self-reliance leads to a decline in cooperation. Moreover, asymmetries in self-reliance undermine social welfare and increase wealth inequality between group members. Less dependent group members often choose to solve the shared problem individually, while more dependent members frequently fail to solve the problem, leaving them increasingly poor. While self-reliance circumvents the free-rider problem, it complicates the governing of the commons.

Efficiency in Repeated Partnerships

Two partners contribute to a common project over time. The value of the project is determined by their aggregate effort and a common productivity parameter about which each partner is privately informed. At each instant, the two partners observe a noisy public signal of total effort. An equilibrium of this game is Markov if agents’ effort choices depend only on the beliefs about the value of the project and calendar time. We characterize the linear Markov equilibrium as the solution to a nonlinear boundary value problem. Equilibrium is unique if agents are symmetric. The equilibrium features a mutual encouragement effect, as agents exaggerate their effort to signal their private information, which counteracts free-riding incentives. If the project lasts sufficiently long, the diffused information structure approximates the first-best in terms of welfare. If instead of distributed private information, one agent has all the information about the productivity parameter, the excessive signalling effect is accentuated. As a result, the centralized information structure can yield output levels above the first best.

Uncertainty-Driven Cooperation

We consider dynamic team production in the presence of uncertainty. Team members receive interim feedback that depends on both their current effort level and the project’s uncertain prospects. In this environment, each member can encourage the others by making them more optimistic about the project’s prospects. We study the extent to which this incentive counters the usual free-riding incentive. Restricting the agents’ access to feedback can increase their equilibrium effort levels by mitigating the ratchet effect. In this case, using joint performance measures can be beneficial even when individual measures are available.

Why do local institutions matter? The political economics of decentralisation

In the last decades, decentralization reforms have often come to the fore of the policy debate in both OECD and non-OECD countries. In spite of the many theorised virtues, these reforms might fail to deliver when local institutions are too weak to guarantee higher accountability of local policy-makers to constituents. To support this argument, this paper analyses the political economics of decentralization reforms in three countries (Burundi, Brazil and Belgium) that differ in terms of their stage of development as well as the “intensity” of their decentralized institutions. In unstable political settings—like those characterising post-conflict countries—, decentralization may fail if leaders exploit entrenched rivalries to weaken local institutions and compete unfairly for power. In more stable settings, decentralization may entail coordination costs that prevent local leaders to jointly provide a decentralized public service and even create incentives for free-riding. Local political dynamics may exacerbate these coordination costs, with collusion among politically aligned leaders blurring their accountability to citizens and leading to lower-quality public services.

Effects of Policy Consequentiality and Payment Vehicle on Contingent Valuation: Structural Estimates on Preference Misrepresentation

Respondents’ belief on policy and payment consequentiality in a stated preference survey can influence the estimation of willingness to pay (WTP). This study introduces a new approach to calibrate WTP estimates using perceived policy consequentiality that enables detailed analyses of the factors behind preference misrepresentations. We examine the effects of perceived policy consequentiality under a single-bounded referendum with a tax or a donation payment vehicle on an individual’s probability of revealing truthful preference and corresponding WTP estimates based on a proposed river restoration project in Florida. We structurally estimate individuals’ misrepresentation probabilities under different levels of perceived policy consequentiality. Our results imply that a higher perceived policy consequentiality reduces preference misrepresentation. The tax payment vehicle is generally preferred to the voluntary donation payment vehicle as the tax reduces free-riding incentives when true WTP is higher than the elicited amounts. We also find that tax has a relative advantage of reducing free-riding incentives while voluntary donation has a relative advantage of reducing the hypothetical bias. Using the predicted probability of truthful representation to calibrate WTP leads to higher levels of WTP estimates and these estimates converge under the tax and donation payment vehicles.

Volunteering at the Workplace under Incomplete Information: Teamsize Does Not Matter

Volunteering is a widespread allocation mechanism at the workplace and emerges naturally in open-source software development, the generation of online knowledge platforms, and to some extent in “agile” work environments. Using a field experiment with 8 treatments and close to 2,800 workers on an online labor market, we study the effect of team size on volunteering at the workplace under incomplete information. In stark contrast to the theoretical predictions, we find no effect of team size on volunteering behavior. With the use of our control treatments, we can show that workers react to free-riding incentives provided by the volunteering setting in general, but do not react strategically to the team size. We show that the result is robust to several further factors.

The choice of institutions to solve cooperation problems: a survey of experimental research

A growing experimental literature studies the endogenous choice of institutions to solve cooperation problems arising in prisoners’ dilemmas, public goods games, and common pool resource games. Participants in these experiments have the opportunity to influence the rules of the game before they play the game. In this paper, we review the experimental literature of the last 20 years on the choice of institutions and describe what has been learned about the quality and the determinants of institutional choice. Cooperative subjects and subjects with optimistic beliefs about others often vote in favor of the institution. Almost all institutions improve cooperation if they are implemented, but they are not always implemented by the players. Institutional costs, remaining free-riding incentives, and a lack of learning opportunities are identified as the most important barriers. Unresolved cooperation problems, like global climate change, are often characterized by these barriers. The experimental results also show that cooperation tends to be higher under endogenously chosen institutions than exogenously imposed institutions. However, a significant share of players fails to implement the institution and they often perform poorly, which is why we cannot conclude that letting people choose is better than enforcing institutions from outside.

The role of social and technical excludability for the success of impure public good and common pool agreements: The case of international fisheries

We argue that international fisheries are a prime example to study the incentive structure of forming impure public good and common pool agreements. We consider a fully integrated multiple zone model, in which zones are linked through density-dependent migration. The incentive to accede to Regional Fishery Management Organizations (RFMOs) is related to multiple characteristics. Firstly, the relative patch sizes of the high seas, which is the internationally (publicly) accessible domain, compared to exclusive economic zones, which are state-owned (privately owned). This can be related to the degree of socially constructed excludability. Secondly, the intensity of fish migration between various zones, which can be related to the degree of technical excludability. Thirdly, the growth rate of the resource, which can be interpreted as the degree of rivalry, with a low (high) degree of rivalry approximating public good (common pool) features. We show that, generally, excludability reduces free-riding incentives but also the need for cooperation, a variant of the “paradox of cooperation”. Moreover, we show that the benefit-cost duality between public goods and common pool resources generally holds except for some extreme parameter values for which a low degree of rivalry fosters the success of cooperation. Finally, through a variation of the diffusion matrix, we can also analyze a closed as well as a sink-source system.

Input, output or mixed monitoring in teams?

In team problems is it better for the principal to reward players based on their individual efforts or should they be rewarded based on collective performance or even a combination of the two? The answer will depend on the importance of two familiar challenges in team works – coordination and free riding. With perfectly complementary efforts, free-riding incentives are absent, so the principal prefers output monitoring over input monitoring but sometimes both may be dominated by mixed-wage incentives. When efforts are perfect substitutes in production, either of the two polar mechanisms may dominate the other but sometimes mixed-wages may dominate both. For more general technologies only output and input monitoring mechanisms are compared. It is shown that when the team production technology is supermodular, coordination becomes the primary concern and monitoring agents through collective output is mostly the better protocol. On the other hand, if the technology is submodular, output monitoring encourages free riding and so input monitoring may be a more attractive alternative.

Wealth, Slaveownership, and Fighting for the Confederacy: An Empirical Study of the American Civil War

How did personal wealth and slaveownership affect the likelihood Southerners fought for the Confederate Army in the American Civil War? On the one hand, wealthy Southerners had incentives to free-ride on poorer Southerners and avoid fighting; on the other hand, wealthy Southerners were disproportionately slaveowners, and thus had more at stake in the outcome of the war. We assemble a dataset on roughly 3.9 million free citizens in the Confederacy and show that slaveowners were more likely to fight than non-slaveowners. We then exploit a randomized land lottery held in 1832 in Georgia. Households of lottery winners owned more slaves in 1850 and were more likely to have sons who fought in the Confederate Army. We conclude that slaveownership, in contrast to some other kinds of wealth, compelled Southerners to fight despite free-rider incentives because it raised their stakes in the war’s outcome.

Informative Fundraising: The Signaling Value of Seed Money and Matching Gifts

While existing theory predicts that matching leadership gifts raise more voluntary contributions for public goods than seed money, recent experiments find otherwise. We reconcile the two by studying a model of leadership giving in a large economy with incomplete information about the quality of the public good provided by a charity. Both the fundraising scheme employed by the charity and the contribution decision by the lead donor may signal the charity's quality to subsequent donors. The charity solicits optimally for a matching gift if the lead donor is informed about the quality of the public good. Intuitively, an informed lead donor conveys quality information to downstream donors through the size of her contribution. As a result, the charity has no signaling concerns and opts for matching because it mitigates the free-riding incentives among donors and leads to higher contributions. The preference for matching, however, reduces when the lead donor's information is limited. Then, the lead donor’s contribution is less informative and the high quality charity utilizes the fundraising scheme to convey information. In particular, the charity uses seed money as a costly signaling device to convince donors of its high quality. As a result, seed money becomes a strong signal of quality and induces higher expected contributions by donors.

Inter-Crops-Allocation (ICA) of CO2 Emissions from Land Use Change

The quantification of CO2 emissions from indirect land use change (ILUC) is proposed by some stakeholders for the inclusion in carbon footprints (CF) of biofuels. The ILUC concept does not appropriately consider so far that each ILUC of a biofuel is direct land use change (DLUC) of another product. This leads to either double counting or free-rider incentives. The articles purpose is to introduce and test inter-crops-allocation (ICA); this new approach allocates CO2 emissions from natural ecosystem conversion between all agricultural activities responsible for the land use change - be it directly or indirectly.

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’ non-cooperative 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.

Friends for (almost) a day: Studying breakaways in cycling races

Abstract We study breakaways in cycling races and examine the determinants of their success. Early on in a cycling race, a small group of riders generally slips away from the main bunch of riders and starts building a lead over this ‘peloton’, in the hopes of staying out of its hands until the finish. The slipstreaming benefits of sheltering behind another rider yield free-riding incentives to each breakaway member, turning the interaction into a social dilemma. This study is the first to empirically examine breakaway success from this perspective. To this end, we employ a self-compiled, rich data set. We find a positive effect of group size and group strength on breakaway success. The effect of group size is concave (i.e., decreasing in size) and becomes negative when the number of riders in the breakaway exceeds 26. This is in line with the opinion of cycling commentators who believe that breakaways can be both ‘too small’ and ‘too large’ to be successful. Our study contributes to the literature studying social dilemmas in the field and strategic behavior in sports.

David and Goliath in the poll booth: group size, political power and voter turnout

ABSTRACTThis article analyses how the presence of a dominant group of voters within the electorate affects voter turnout. Theoretically, we argue that its absolute size affects turnout via increased free-riding incentives and reduced social pressure to vote within a larger dominant group. Its relative size compared to other groups within the electorate influences turnout through instrumental and expressive responses – in both the dominant and dominated groups – to the degree of electoral competition between groups. Empirical evidence from a large cross section of German municipalities is in line with these theoretical predictions. The observed effects should be taken into account when redesigning electoral jurisdictions through, for instance, municipal mergers or gerrymandering.