Self-reliance and the provision of a tax financed good. An experimental approach

2024-06-19

2024-06-26

We investigate the treatment effects on tax rate preference and public or private good choice.

First, we test the effect generated by a lower cost of being self-reliant (private good price is lower).

Hypothesis 1 (H1): when the price of the private good is lower (plow), the tax rate selected by the group (t) falls and the private good is preferred by all group participants.

To test H1, we compare participants' responses when the price is higher (phigh) with the responses when the price is lower (plow). This, both in the scenario where there are homogeneous endowments and, in the scenario, where there are heterogeneous endowments (high-income, middle-income, low-income).

Second, we test the effect of introducing inequality (heterogeneous endowments).

H2: the introduction of inequality does not affect the preferences of the pivot voter (median-income).

To test H2, we compare the behavior of participants in the homogeneous endowment scenario (endowment equal to the middle-income of the heterogeneous endowment scenario) with the behavior of the middle-income participants in the heterogeneous endowment scenario.

H3: inequality increases when the price of the private good falls in the heterogeneous endowment scenario.

To test H3, we compare the Gini index from the payoffs of the different types of participants (high-income, middle-income, low-income) when the price is phigh and when the price is plow.

Control variables from a short questionnaire at the end of the experiment: Demographics: Sex, age, field of study, schooling background (whether private or public school).

Social preferences: prosocial behavior, preferences and beliefs about public goods.

This experiment will be conducted by the experimental laboratory of the University of Hamburg (Germany) in an online setting. The participants will be assigned to groups of three players who interact in a private-public goods game. They will use their endowment to choose between a public option available to all or a private option available only to those who pay. The quality and, therefore, the return rate on investment of the public option increases with the tax rate. On the other hand, the quality and, therefore, the return rate on investment of the private substitute is constant and equal to the optimal return of the public option. This optimal return occurs when participants vote for the tax rate greater than zero that maximizes their payoff. This means that the quality of the public good can be at most as good as the private substitute.

The experiment is divided into two phases. In each phase participants face a different price of the private good (p) depending on the treatment. In one type of treatment, they face first phigh and then plow. In the other type of treatment, they face first plow and then phigh. Participant’s task for each phase is divided in two steps:

1. They will vote for the tax rate (ti) of their preference for funding the public option from a list of 6 different options. For each tax rate, participants know the endowments and expected payoffs for themselves and the other members of the group. They choose the tax rate simultaneously. At the moment of their decision, they do not know which tax rate was chosen by the other two players. The tax rate selected (t) will be the median of the rates voted by the three participants in the group. Everybody in the group will be charged this tax rate. This rate is multiplied by the endowment to determine the tax value for each participant (yi*t).

2. They will decide whether they choose the public or the private option for each of the possible tax rates (strategy method). For this decision they also have full information on the endowments and expected payoffs for themselves and the other participants.

Then, they will answer a survey. Finally, the votes of the 3 participants in each group are computed to designate the tax rate to be used for the calculation of each participant's payoff. For the calculation of the payoff, one of the two phases of the experiment will be used randomly. That is, the payoff result when phigh or the payoff result when plow.

In treatment 1, participants have the same endowment and face first phigh (p being high enough that the payoff of the private option is not sufficiently attractive to vote t=0). Then participants face plow (p being low enough that payoff of the private option is sufficiently attractive to vote t=0). In treatment 2, the procedure is the same, the only element that changes is that participants first face plow and then phigh.

For treatments 3 and 4 heterogeneous endowments are introduced yet keeping the same procedure. One of the participants is a high-income, one a middle-income and one a low-income player. In treatment 3, participants face first phigh (p being high enough that only for the high-income participant the payoff of the private option is sufficiently attractive to vote t=0). Then participants face plow (p being low enough that for the high-income and middle-income participants the payoff of the private option is sufficiently attractive to vote t=0). Finally, in treatment 4, participants face first plow and then phigh.

Randomization into treatments as well as locations and roles within the experiment done by computer.

Groups of three.

No

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180 observations (4 treatments, each having 15 groups of 3 participants). Thus, 15 independent observations per treatment, in total 60.

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