Those Outsiders: How Downstream Externalities Affect Public Good Provision

Sarah Jacobson and Jason Delaney
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Jason Delaney: School of Business Administration, Georgia Gwinnett College

No 2013-09, Department of Economics Working Papers from Department of Economics, Williams College

Abstract: Some policy problems pit the interests of one group against those of another group. One group may, for example, determine the provision of a project (such as a power plant or a dam) that benefits group members but has downstream externalities that hurt people outside the group. We introduce a model of projects with such asymmetries. In-group members may contribute to a common fund that benefits them as a public good. In the model, benefits from the project may or may not vary within the group. Project provision has negative downstream externalities: common fund contributions hurt agents outside the in-group ("Outsiders") rendering common fund contributions anti-social overall. Many models of social preferences predict that such externalities should reduce or eliminate project provision, although conditional cooperation or a preference for in-group members may counteract this effect. We test this model with a lab experiment. With homogeneous in-group benefits, the presence of negative downstream externalities reduces contribution levels by nearly half. We introduce a rotating high-return position that allows subjects to trade favors. Contributions diminish only slightly with the introduction of the negative externality and reciprocal giving occurs whether or not Outsiders are present.

Keywords: public bad; public good; social preferences; reciprocity; externalities; in-group-out-group; parochial altruism (search for similar items in EconPapers)
JEL-codes: C91 D01 D62 D71 H41 Q50 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2013-09
New Economics Papers: this item is included in nep-cbe, nep-cdm, nep-exp, nep-net and nep-ppm
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Journal Article: Those outsiders: How downstream externalities affect public good provision (2014)
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