Public Goods Agreements with Other Regarding Preferences

Why cooperation occurs when noncooperation appears to be individually rational has been an issue in economics for at least a half century. In the 1960s and 1970s, the context was cooperation in the prisoner’s dilemma game; in the 1980s, concern shifted to voluntary provision of public goods; in the 1990s, the literature on coalition formation for public goods provision emerged, in the context of coalitions to provide transboundary pollution abatement.

The problem is that theory suggests fairly low (even zero) levels of contributions to the public good and high levels of free riding. Experiments and empirical evidence suggests higher levels of cooperation. This is a major reason for the emergence in the 1990s and more recently of the literature on other-regarding preferences (also known as social preferences). Such preferences tend to involve higher levels of cooperation (though not always).

This paper contributes to the literature on coalitions, public good provision and other-regarding preferences. For standard preferences, the marginal per capita return (MPCR) to investing in the public good must be greater than one for contributing to be individually rational.

We find that Charness-Rabin preferences tend to reduce this threshold for individual contributions. We also find that Charness-Rabin preferences reduce the equilibrium size of a coalition of agents formed to provide the public good. In addition to theoretical results, some experimental implications of the theoretical model are provided. In contrast to much of the literature, we treat the wealth of agents as heterogeneous.

Speaker: Charles D Kolstad (Bren School of Environmental Science and Management, University of California)

Biography of Charles D Kolstad

Charles is an internationally known economist who once served as a Peace Corps volunteer in Ghana and has taught at universities in the U.S, Russia, and Belgium. His research interests are in information, uncertainty and regulation and hhe does much of his applied work in the area of climate change and energy markets.

Currently Charles is a Convening Lead Author for the Intergovernmental Panel on Climate Change (co-recipient of the 2007 Nobel Peace Prize), an advisor to the California Air Resources Board and Editor of the journal Review of Environmental Economics & Policy. He is a former president of the Association of Environmental and Resource Economists (AERE) and has authored more than 100 publications, including the undergraduate text, Environmental Economics, which has been translated into Japanese, Spanish and Chinese; the second edition was published in Spring 2010.

At UC Santa Barbara, Charles is a Professor in the School of Environmental Science & Management and in the Department of Economics. He is also Co-Director of the newly established University of California Center for Energy & Environmental Economics, a joint undertaking of UC Berkeley and UC Santa Barbara. He is a University Fellow at Resources for the Future (Washington), a Research Associate at the National Bureau of Economic Research (Cambridge) and a Fellow of CESifo (Munich).

In 2009, Charles was elected Fellow of the Association of Environmental and Resource Economists.

He received his PhD from Stanford in 1982.