Experimental Analysis of Risk and Uncertainty in Provisioning Private and Public Goods

I. INTRODUCTION This paper investigates how individuals perceive risks and uncertainties when making decisions about private and public goods. Using the framework of public goods games and laboratory experiments, we study whether--in payoff-equivalent situations--decision makers contribute more or less toward private and public goods when outcomes involve different forms of risks and uncertainties. The economics literature usually applies the term "uncertainty" to describe situations when the probabilities of possible future events are unknown. The term "risk" on the other hand is used to describe situations when the probabilities of future events are known. (1) The presence of uncertainty and risk can be very important in the provisioning of public goods and in policy making. For example, classic public good problems like climate change and depletion of the ozone layer can be thought to differ in the degree of knowledge about the probabilities associated with the events. While climate change is undoubtedly a case of uncertainty since less precise probability estimates exist in either science or economics, the ozone layer depletion can be characterized more as risk since detailed scientific and economic predictions exist about the depletion of the ozone layer and its impact on human health (e.g., melanoma, cataracts). Risk and uncertainty exist in the private domain as well. For example, in the area of individual health, some estimates exist about the correlation between smoking and lung cancer (could be characterized as risk); however, research is still in its infancy on the connection between working with animals and being susceptible to diseases like bird flu (a case of uncertainty). In addition to the risks and uncertainties mentioned above, the process of policy making involves further uncertainties due to the unknown information about the decisions of others. In the standard noncooperative experimental setting of public goods and common pool resource games, there is always uncertainty about the ultimate size of the public good or resource request, as subjects do not know how other group members will behave. Messick, Allison, and Samuelson (1988) refer to this uncertainty as "strategic uncertainty." (2) An implicit assumption underlying these public goods and common pool resource dilemma games is that the optimal size of the public good or the carrying capacity of the commons is known and that there is no uncertainty associated with the benefits of the public or private good. (3) However, in many problems, decision makers do not know with certainty the optimal level of public goods of the carrying capacity of the resource. For example, continuing with the example of climate change, the optimal level of carbon dioxide emissions abatement and the costs and benefits of proposed mitigation strategies are not known with certainty. Messick, Allison, and Samuelson (1988, 678-79) introduced the terminology "environmental uncertainty" to distinguish this external factor from strategic uncertainty: "Environmental uncertainty refers to environmental variables that determine which group action is best, while [strategic] uncertainty centres on how other group members will respond ... The problem that is raised by the environmental uncertainty is the problem of optimality or efficiency, while the problem raised by [strategic] uncertainty is (...) coordination." Several researchers have found that the distinction between strategic and environmental uncertainty is important in decision making. (4) Existing literature focuses mainly on uncertainty in common pool resource dilemmas where risk and uncertainty are defined in terms of threshold uncertainty. Messick, Allison, and Samuelson (1988), for example, incorporated a probabilistic destruction of the resource when the safe yield was surpassed. In their experiment, groups of four subjects participated in a single-trial task. If the group total request were below a certain threshold, each group member received his request. …

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