The role of risk aversion in public goods dilemmas with environmental uncertainty: an experimental analysis

ABSTRACT

The purpose of this study is to extend earlier research on environmental uncertainty in public goods dilemmas. The present paper reports the results of an experiment designed to examine the effect of risk aversion on public goods provision. A von Neumann–Morgenstern utility function with constant coefficient of relative risk aversion is used to investigate the impact of risk attitudes within a threshold public goods environment. The outcome of the threshold public goods experiment shows that subjects are indifferent to the changes in environmental conditions. Additionally, the analysis indicates that risk aversion is a significant determinant of voluntary public goods contribution level.

KEYWORDS:

• Experiment
• public goods
• risk aversion
• environmental uncertainty

JEL CLASSIFICATION:

• C90
• C91
• H41

Acknowledgments

I would like to thank Daniel Friedman for his helpful comments on earlier versions of this article.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ For the sake of simplicity, as most previous studies have done, the terms ‘uncertainty’ and ‘risk’ are used interchangeably throughout this paper, regardless of the type (known/unknown) of probability.

² Some researchers prefer to use the term ‘strategic uncertainty’ instead of social uncertainty (e.g. Gangadharan and Nemes 2009).

³ Subjects were told that they would remain in the same group throughout the experiment; but they didn’t know who the other group members are.

⁴ No information was given to the subjects at the end of first two treatments in order to prevent systematic effects.

⁵ In integral units (i.e.0, 1, …, 20).

⁶ Friedman test statistic = 5.5900, Kendall test statistic = 0.0186.

⁷ T1: Spearman’s rho = −0.8907, p < 0.000; T2: Spearman’s rho = −0.8851, p < 0.000; T3: Spearman’s rho = −0.8885, p < 0.000.

⁸ T2 and T3 are dummy variables for treatments.

⁹ The predicted value of contribution is 3.096 points higher for female subjects than male subjects.

¹⁰ Additionally, a tobit model is created to check the results. The result confirms the relationship between contribution-CRRA (coefficient = −7.9202, p = 0.0000); and contribution-gender (coefficient = 3.1723, p = 0.0000).

¹¹ It is very difficult to compare the results of the present study with previous empirical research, because this experiment is a first attempt to use CRRA in order to examine the effect of risk attitudes within this experimental context.

¹² Sandler, Sterbenz, and Posnett (1987) indicate that the conclusion of Austen-Smith (1980) is in error.

¹³ Because the regression analysis indicates that treatment variables (T2 and T3) have no significant impact on contribution level.

Additional information

Funding

This work was supported by the Scientific and Technological Research Council of Turkey under Grant [2219/1059B191601150].