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Induced-value tests of the referendum voting mechanism
Economics Letters 71 (2001) 61–65 www.elsevier.com / locate / econbase
Induced-value tests of the referendum voting mechanism Laura O. Taylor a , *, Michael McKee b , Susan K. Laury a , Ronald G. Cummings a a
Department of Economics, Andrew Young School of Policy Studies, Georgia State University, Atlanta, GA 30303 -3083, USA b Department of Economics, University of New Mexico, Albuquerque, NM 87131, USA Received 26 January 2000; received in revised form 21 September 2000; accepted 7 November 2000
Abstract An induced-value laboratory experiment is conducted testing the incentive compatibility of the referendum voting mechanism for eliciting willingness to pay for public goods. Although errors were observed at the individual level, aggregate results suggest incentive compatibility in both hypothetical and real referenda. 2001 Elsevier Science B.V. All rights reserved. Keywords: Experiments; Referendum; Contingent valuation JEL classification: C91; H41; Q26
1. Introduction Controversy over the validity of the Contingent Valuation (CV) method for valuing public goods has motivated recent research that incorporates experimental-economics methods into the valuation process in an attempt to validate CV surveys. Generally, willingness to pay (WTP) statements are obtained from subjects in hypothetical, CV-type markets, which are compared to WTP elicited in identical markets where payments are binding. Results often indicate significant differences between responses to the hypothetical WTP questions as compared to the ‘real’ WTP questions (see, for example, Brown et al., 1996; Cummings and Taylor, 1999). These differences are attributed to upward ‘hypothetical bias’ in responses to the hypothetical markets. In these experiments, incentive-compatible revelation mechanisms should be used to elicit WTP since responses to the ‘real markets’ are used as the benchmark for comparison with hypothetical markets. This is particularly important when eliciting values for public goods, where there are *Corresponding author. Tel.: 11-404-651-2873; fax: 11-404-651-2827. E-mail address: [email protected] (L.O. Taylor). 0165-1765 / 01 / $ – see front matter PII: S0165-1765( 00 )00410-9
2001 Elsevier Science B.V. All rights reserved.
L.O. Taylor et al. / Economics Letters 71 (2001) 61 – 65
62
incentives for individuals to free-ride in the real markets. Recently, Cummings and Taylor (1999), Cummings et al. (1997) and Bjornstad et al. (1997) implemented experiments eliciting WTP for public goods using a referendum voting mechanism. The referendum was chosen over other mechanisms, such as voluntary contributions, for its (theoretically) incentive compatible properties. Subjects were asked to vote on a proposition requiring every subject in the room to pay $10 to a public good (such as a non-profit organization protecting rainforests) if the referendum passed. Generally, their results indicated a significantly higher percentage of subjects voting yes in the hypothetical referenda than in the real referenda. One criticism of these experiments is that the referenda were not ‘closed’ and so subjects in the real experiments may have been free-riding off of contributions to the non-profit organizations by the general public (Taylor, 1998). Thus, it could not be unequivocally established that the benchmark, real responses indeed reflected the individual’s true WTP, since the possibility existed that they were biased downwards due to free-riding. A second criticism is that, with real commodities being used, the experimenter cannot know the true values of the individuals in the experiment. In response to these criticisms, this research conducts an induced-value referendum voting experiment using both hypothetical and real treatments for a public good in a closed referendum setting. Because we know each subject’s payoff (or value), we can isolate whether the referendum mechanism — either hypothetical or real — is incentive compatible.
2. Experimental design Eight sessions were conducted with 273 subjects at Georgia State University. Students were paid a $7 participation fee. Each subject was given a copy of the instructions, which were read aloud.1 The instructions described the referendum, focusing on the following information. This was a secret ballot, majority rule referendum. If it passed, each subject in the room paid $5 (regardless of whether they voted yes or no) and in return they received ‘the good’, which was simply an amount of money that would be paid to them at the end of the experiment. If it did not pass, no one paid $5 and no one received the good, regardless of how they voted. The amount they received varied across individuals, ranging from $1 to $10 (Table 1 lists all possible values). Subjects were told that not everyone had the same value — so they were to look closely at their personal value. Subjects were not told the range of values, nor were they told how many subjects of each type were in the experiment. They were instructed to vote ‘yes’ if they would like the referendum to pass, and ‘no’ if they did not want the referendum to pass. The hypothetical and real referenda were identical except subjunctive language was used to describe the referendum. The hypothetical referendum began by asking the subjects to ‘‘ . . . put yourself in the following situation. Suppose you were all going to vote in a referendum . . . ’’ and then used subjunctive language throughout the instructions such as ‘‘each of you would pay a $5 cost — and each person would receive the ‘good’.’’ (bold emphasis added). Other aspects were identical to the real referendum: subjects were paid the same participation fee and followed the same rules and procedures (except that no payments resulted if the referendum passed). 1
Instructions are available at http: / / www.gsu.edu / |ecoskl.
L.O. Taylor et al. / Economics Letters 71 (2001) 61 – 65
63
Table 1 Voting results Values ($)
Real referenda [ Yes
[ No
Hypothetical referenda Total
[ Yes
[ No
Total
1.00 1 12 13 0 9 9 2.00 0 12 12 0 10 10 3.00 2 10 12 1 9 10 4.00 1 13 14 2 9 11 4.50 0 6 6 0 8 8 4.75 0 6 6 2 6 8 4.90 1 5 6 1 7 8 4.95 2 6 8 1 7 8 --------------------------------------------------------------------------------------------------5.05 1 4 5 5 3 8 5.10 2 3 5 5 3 8 5.25 5 1 6 6 2 8 5.50 2 3 5 6 2 8 6.00 6 0 6 7 3 10 7.00 10 0 10 8 2 10 8.00 7 2 9 9 1 10 9.00 0 0 0 5 0 5 10.00 6 1 7 3 1 4 Total
46
84
130
61
82
143
We denote subjects with values greater than the $5 cost as ‘winners’ and subjects with values less than $5 as ‘losers.’ Individuals in each experiment were divided approximately equally between winners and losers, subject to an overall constraint that the referendum would not pass if everyone voted to maximize own earnings. To maximize own earnings, losers should vote no and winners should vote yes. We term any deviation from this voting pattern a ‘mis-vote’ because it results in lost earnings. Our expectations were that: there would be no mis-votes in the real referendum since it is a theoretically demand-revealing valuation mechanism; there may or may not be mis-votes in the hypothetical referendum; and if mis-votes are observed, they are more likely to occur with the payoffs that are close to the cost of $5.00 (i.e., where the cost to the subject of mis-voting was relatively small).
3. Results Table 1 reports the overall voting results. If the referendum passes, subjects with values above the dashed line (values less than $5) incur a net loss and those below the dashed line incur a net gain. A mis-vote is a yes vote for those above the dashed line, and a no vote for those below the dashed line. Contrary to our expectations, there were mis-votes by both winners and losers. Overall, 21 of 130 votes were mis-votes in the real referendum: seven by losers and 14 by winners, which are significantly different at the 1% level (Pearson x 2 5 6.96). If earnings less than $1 are not salient, this
L.O. Taylor et al. / Economics Letters 71 (2001) 61 – 65
64 Table 2 Probit results a Variable
Coefficient estimate (z-statistic)
DISTANCE WIN HYPO N (ln +)
Marginal effect
20.219 (3.10)
0.049
0.673 (3.48)
0.156
20.084 (0.44)
20.019
273 (2110.88)
a The dependent variable is a 0,1 variable equal to 1 if the subject mis-voted. Marginal effects are computed at the mean of the data.
may account for the larger number of mis-votes by winners. Focusing on those subjects with values of at least $6 for winners or $4 or less for losers, we find no significant difference in the number of misses between winners and losers. We had no prior hypothesis about mis-votes in the hypothetical referendum. In these sessions, 24 of 143 votes were mis-votes: seven by losers and 17 by winners, which are significantly different at the 3% level (Pearson x 2 5 5.18). This difference disappears if we focus on subjects with values of less than $4 or more than $6. Interestingly, we find no significant difference in voting behavior between the real and hypothetical referenda. Overall, 16.1% of subjects mis-voted in the real referenda and 16.8% mis-voted in the hypothetical referenda. Among those with net-payoffs / net-losses of greater than $1, there were slightly more mis-votes in the hypothetical referenda (12.7%) than in the real referenda (8.4%), although these are not significantly different (Pearson x 2 5 0.77). Among winners, there is no significant difference in mis-votes between the hypothetical and real referenda. This is also true of losers. Table 2 presents probit estimates showing the probability of a mis-vote as a function of the absolute value of the net-earnings / net-loss (DISTANCE), a dummy variable indicating whether the subject had positive net-earnings (WIN51 if positive net-earnings), and a dummy variable indicating whether the referendum was hypothetical (HYPO51 if hypothetical). Results indicate that the probability of a mis-vote increases as the size of the net-earnings (net-loss) decreases. A $1 increase in earnings decreases the probability that a subject mis-votes by approximately 5%. The model also indicates that winners are more likely to mis-vote than losers by approximately 15%, and that subjects in the hypothetical referenda are no more likely to mis-vote than those in the real referenda.
4. Conclusions Although there were some mis-votes in our referendum experiment at the individual level, the mis-votes by winners and losers countered each other so that the aggregate results were approximately
L.O. Taylor et al. / Economics Letters 71 (2001) 61 – 65
65
demand revealing. Rewards and penalties of less than $1 may not have been salient because we observe a significantly higher proportion of mis-votes by subjects with net-earnings / net-losses of less than $1. Surprisingly, subjects in the hypothetical referenda did not mis-vote at a higher rate than in the real referenda. In other words, the hypothetical and real induced-value referenda performed equally well in eliciting demand. With respect to validating contingent valuation surveys, our results may indicate that it is not the value elicitation problem (i.e., formulating a vote given a value for the good), but the value formation problem that may be at the heart of the prevalent ‘hypothetical bias’ results found in previous CV validation experiments. That is, subjects may form their values for a good differently in a hypothetical market than in a market in which real money is ‘on the line.’ However, given a value has been formed, the hypothetical nature of the payment mechanism may not induce different revelation behavior as compared to a real payment mechanism.
References Bjornstad, D., Cummings, R., Osborne, L., 1997. A learning design for reducing hypothetical bias in the contingent valuation method. Environmental and Resource Economics 10, 207–221. Brown, T., Champ, P., Bishop, R., McCollum, D., 1996. Response formats and public good donations. Land Economics 72, 152–166. Cummings, R., Elliott, S., Harrison, G., Murphy, J., 1997. Are hypothetical referenda incentive compatible? Journal of Political Economy 3, 609–621. Cummings, R., Taylor, L., 1999. Unbiased value estimates for environmental goods: a cheap talk design for the contingent valuation method. American Economic Review 89, 649–665. Taylor, L., 1998. Incentive compatible referenda and the valuation of environmental goods. Agricultural and Resource Economics Review 27, 132–139.
Induced-value tests of the referendum voting mechanism Laura O. Taylor a , *, Michael McKee b , Susan K. Laury a , Ronald G. Cummings a a
Department of Economics, Andrew Young School of Policy Studies, Georgia State University, Atlanta, GA 30303 -3083, USA b Department of Economics, University of New Mexico, Albuquerque, NM 87131, USA Received 26 January 2000; received in revised form 21 September 2000; accepted 7 November 2000
Abstract An induced-value laboratory experiment is conducted testing the incentive compatibility of the referendum voting mechanism for eliciting willingness to pay for public goods. Although errors were observed at the individual level, aggregate results suggest incentive compatibility in both hypothetical and real referenda. 2001 Elsevier Science B.V. All rights reserved. Keywords: Experiments; Referendum; Contingent valuation JEL classification: C91; H41; Q26
1. Introduction Controversy over the validity of the Contingent Valuation (CV) method for valuing public goods has motivated recent research that incorporates experimental-economics methods into the valuation process in an attempt to validate CV surveys. Generally, willingness to pay (WTP) statements are obtained from subjects in hypothetical, CV-type markets, which are compared to WTP elicited in identical markets where payments are binding. Results often indicate significant differences between responses to the hypothetical WTP questions as compared to the ‘real’ WTP questions (see, for example, Brown et al., 1996; Cummings and Taylor, 1999). These differences are attributed to upward ‘hypothetical bias’ in responses to the hypothetical markets. In these experiments, incentive-compatible revelation mechanisms should be used to elicit WTP since responses to the ‘real markets’ are used as the benchmark for comparison with hypothetical markets. This is particularly important when eliciting values for public goods, where there are *Corresponding author. Tel.: 11-404-651-2873; fax: 11-404-651-2827. E-mail address: [email protected] (L.O. Taylor). 0165-1765 / 01 / $ – see front matter PII: S0165-1765( 00 )00410-9
2001 Elsevier Science B.V. All rights reserved.
L.O. Taylor et al. / Economics Letters 71 (2001) 61 – 65
62
incentives for individuals to free-ride in the real markets. Recently, Cummings and Taylor (1999), Cummings et al. (1997) and Bjornstad et al. (1997) implemented experiments eliciting WTP for public goods using a referendum voting mechanism. The referendum was chosen over other mechanisms, such as voluntary contributions, for its (theoretically) incentive compatible properties. Subjects were asked to vote on a proposition requiring every subject in the room to pay $10 to a public good (such as a non-profit organization protecting rainforests) if the referendum passed. Generally, their results indicated a significantly higher percentage of subjects voting yes in the hypothetical referenda than in the real referenda. One criticism of these experiments is that the referenda were not ‘closed’ and so subjects in the real experiments may have been free-riding off of contributions to the non-profit organizations by the general public (Taylor, 1998). Thus, it could not be unequivocally established that the benchmark, real responses indeed reflected the individual’s true WTP, since the possibility existed that they were biased downwards due to free-riding. A second criticism is that, with real commodities being used, the experimenter cannot know the true values of the individuals in the experiment. In response to these criticisms, this research conducts an induced-value referendum voting experiment using both hypothetical and real treatments for a public good in a closed referendum setting. Because we know each subject’s payoff (or value), we can isolate whether the referendum mechanism — either hypothetical or real — is incentive compatible.
2. Experimental design Eight sessions were conducted with 273 subjects at Georgia State University. Students were paid a $7 participation fee. Each subject was given a copy of the instructions, which were read aloud.1 The instructions described the referendum, focusing on the following information. This was a secret ballot, majority rule referendum. If it passed, each subject in the room paid $5 (regardless of whether they voted yes or no) and in return they received ‘the good’, which was simply an amount of money that would be paid to them at the end of the experiment. If it did not pass, no one paid $5 and no one received the good, regardless of how they voted. The amount they received varied across individuals, ranging from $1 to $10 (Table 1 lists all possible values). Subjects were told that not everyone had the same value — so they were to look closely at their personal value. Subjects were not told the range of values, nor were they told how many subjects of each type were in the experiment. They were instructed to vote ‘yes’ if they would like the referendum to pass, and ‘no’ if they did not want the referendum to pass. The hypothetical and real referenda were identical except subjunctive language was used to describe the referendum. The hypothetical referendum began by asking the subjects to ‘‘ . . . put yourself in the following situation. Suppose you were all going to vote in a referendum . . . ’’ and then used subjunctive language throughout the instructions such as ‘‘each of you would pay a $5 cost — and each person would receive the ‘good’.’’ (bold emphasis added). Other aspects were identical to the real referendum: subjects were paid the same participation fee and followed the same rules and procedures (except that no payments resulted if the referendum passed). 1
Instructions are available at http: / / www.gsu.edu / |ecoskl.
L.O. Taylor et al. / Economics Letters 71 (2001) 61 – 65
63
Table 1 Voting results Values ($)
Real referenda [ Yes
[ No
Hypothetical referenda Total
[ Yes
[ No
Total
1.00 1 12 13 0 9 9 2.00 0 12 12 0 10 10 3.00 2 10 12 1 9 10 4.00 1 13 14 2 9 11 4.50 0 6 6 0 8 8 4.75 0 6 6 2 6 8 4.90 1 5 6 1 7 8 4.95 2 6 8 1 7 8 --------------------------------------------------------------------------------------------------5.05 1 4 5 5 3 8 5.10 2 3 5 5 3 8 5.25 5 1 6 6 2 8 5.50 2 3 5 6 2 8 6.00 6 0 6 7 3 10 7.00 10 0 10 8 2 10 8.00 7 2 9 9 1 10 9.00 0 0 0 5 0 5 10.00 6 1 7 3 1 4 Total
46
84
130
61
82
143
We denote subjects with values greater than the $5 cost as ‘winners’ and subjects with values less than $5 as ‘losers.’ Individuals in each experiment were divided approximately equally between winners and losers, subject to an overall constraint that the referendum would not pass if everyone voted to maximize own earnings. To maximize own earnings, losers should vote no and winners should vote yes. We term any deviation from this voting pattern a ‘mis-vote’ because it results in lost earnings. Our expectations were that: there would be no mis-votes in the real referendum since it is a theoretically demand-revealing valuation mechanism; there may or may not be mis-votes in the hypothetical referendum; and if mis-votes are observed, they are more likely to occur with the payoffs that are close to the cost of $5.00 (i.e., where the cost to the subject of mis-voting was relatively small).
3. Results Table 1 reports the overall voting results. If the referendum passes, subjects with values above the dashed line (values less than $5) incur a net loss and those below the dashed line incur a net gain. A mis-vote is a yes vote for those above the dashed line, and a no vote for those below the dashed line. Contrary to our expectations, there were mis-votes by both winners and losers. Overall, 21 of 130 votes were mis-votes in the real referendum: seven by losers and 14 by winners, which are significantly different at the 1% level (Pearson x 2 5 6.96). If earnings less than $1 are not salient, this
L.O. Taylor et al. / Economics Letters 71 (2001) 61 – 65
64 Table 2 Probit results a Variable
Coefficient estimate (z-statistic)
DISTANCE WIN HYPO N (ln +)
Marginal effect
20.219 (3.10)
0.049
0.673 (3.48)
0.156
20.084 (0.44)
20.019
273 (2110.88)
a The dependent variable is a 0,1 variable equal to 1 if the subject mis-voted. Marginal effects are computed at the mean of the data.
may account for the larger number of mis-votes by winners. Focusing on those subjects with values of at least $6 for winners or $4 or less for losers, we find no significant difference in the number of misses between winners and losers. We had no prior hypothesis about mis-votes in the hypothetical referendum. In these sessions, 24 of 143 votes were mis-votes: seven by losers and 17 by winners, which are significantly different at the 3% level (Pearson x 2 5 5.18). This difference disappears if we focus on subjects with values of less than $4 or more than $6. Interestingly, we find no significant difference in voting behavior between the real and hypothetical referenda. Overall, 16.1% of subjects mis-voted in the real referenda and 16.8% mis-voted in the hypothetical referenda. Among those with net-payoffs / net-losses of greater than $1, there were slightly more mis-votes in the hypothetical referenda (12.7%) than in the real referenda (8.4%), although these are not significantly different (Pearson x 2 5 0.77). Among winners, there is no significant difference in mis-votes between the hypothetical and real referenda. This is also true of losers. Table 2 presents probit estimates showing the probability of a mis-vote as a function of the absolute value of the net-earnings / net-loss (DISTANCE), a dummy variable indicating whether the subject had positive net-earnings (WIN51 if positive net-earnings), and a dummy variable indicating whether the referendum was hypothetical (HYPO51 if hypothetical). Results indicate that the probability of a mis-vote increases as the size of the net-earnings (net-loss) decreases. A $1 increase in earnings decreases the probability that a subject mis-votes by approximately 5%. The model also indicates that winners are more likely to mis-vote than losers by approximately 15%, and that subjects in the hypothetical referenda are no more likely to mis-vote than those in the real referenda.
4. Conclusions Although there were some mis-votes in our referendum experiment at the individual level, the mis-votes by winners and losers countered each other so that the aggregate results were approximately
L.O. Taylor et al. / Economics Letters 71 (2001) 61 – 65
65
demand revealing. Rewards and penalties of less than $1 may not have been salient because we observe a significantly higher proportion of mis-votes by subjects with net-earnings / net-losses of less than $1. Surprisingly, subjects in the hypothetical referenda did not mis-vote at a higher rate than in the real referenda. In other words, the hypothetical and real induced-value referenda performed equally well in eliciting demand. With respect to validating contingent valuation surveys, our results may indicate that it is not the value elicitation problem (i.e., formulating a vote given a value for the good), but the value formation problem that may be at the heart of the prevalent ‘hypothetical bias’ results found in previous CV validation experiments. That is, subjects may form their values for a good differently in a hypothetical market than in a market in which real money is ‘on the line.’ However, given a value has been formed, the hypothetical nature of the payment mechanism may not induce different revelation behavior as compared to a real payment mechanism.
References Bjornstad, D., Cummings, R., Osborne, L., 1997. A learning design for reducing hypothetical bias in the contingent valuation method. Environmental and Resource Economics 10, 207–221. Brown, T., Champ, P., Bishop, R., McCollum, D., 1996. Response formats and public good donations. Land Economics 72, 152–166. Cummings, R., Elliott, S., Harrison, G., Murphy, J., 1997. Are hypothetical referenda incentive compatible? Journal of Political Economy 3, 609–621. Cummings, R., Taylor, L., 1999. Unbiased value estimates for environmental goods: a cheap talk design for the contingent valuation method. American Economic Review 89, 649–665. Taylor, L., 1998. Incentive compatible referenda and the valuation of environmental goods. Agricultural and Resource Economics Review 27, 132–139.