Description of the Experiment
We will recruit 20-24 participants in each session of the experiment. Each session will last 1 hour and 45 minutes. In each session, we will divide the participants in five or six groups of four. We will analyze two treatments: voluntary contribution mechanism (VCM) and two-sided punishment (PCP). The participants will play ten rounds of VCM and ten rounds of PCP. At the beginning of each round, we will randomly assigned participants to a group and they will receive an endowment of 20 Experimental Currency Units (ECU). VCM consists of deciding how much to allocate from the endowment to a private account and a public account. At the end of each round, participant earnings which is given by the following formula:
[(Endowment-Contribution to public account) + 0.4*Total contribution of the group to public account].
Each round agents will decide how much to keep and how much to allocate to the group account. Each round they learn their own earnings, and so can infer the aggregate contributions of their group, but they will not know anything about the individual contributions of the other group members. We will inform participants in advance of how we will calculate their income in each round. After the ten rounds of VCM, participants will make decisions under PCP for other ten rounds. In each round, we will randomly assigned them to a new group. PCP consists of three stages per round:
1. At the beginning of this stage, agents will receive a 25 ECUs one-off lump sum payment that they can use at the end of the ten rounds to pay for eventual losses during this treatment. This lump sum payment is not considered when calculating the income of the round. Participants will receive a 20 ECU endowment to split between the public account and the private account. Then, we will inform them about their income [(Endowment of ECUs – Own contribution to the project) + 0.4*Total contribution tothe project]. This stage is similar to VCM plus the one-off lump sum payment.
2. In this stage, we will inform participants of each group member contribution to the public project in the first stage. Participants will have the opportunity to punish their teammates. They can reduce or leave equal the income of each member of the group by distributing points. Participants will choose points to assign to each group member. If a participant chooses zero points for a particular member, then the other member’s income will not change. However, each point assigned to a member reduces her income by 10%. Therefore, if a member receives 10 points or more, her income from the first stage will be reduced by 100%. However, each point distributed to another member has a cost in ECUs. Participants can distribute between 0 to 10 points to each group member. The more points a participant gives to any group member, the higher the costs. The total costs for each participant will be the sum of the costs of distributing points to each of the other three group members. The total income from stage 2 is as follows:
Total income at the end of stage 2 = (Income from the stage 1)*[1 – (1/10)*received points] – cost of distributed points
This total income can be negative if the cost of distributed points is higher than the income in the first stage. If agents have zero or negative income at the end of this stage, they will not be allowed to continue to the third stage.
3. In this stage, agents will be informed about the points that the other group members assigned to them in the second stage. They will have the opportunity of assigning points back to the other participants to reduce their income. A participant can only assign counter-points to those participants who assigned points to her in the previous stage. Each point assigned to another participant will reduce her income by 10% and the cost of each point will be the same as in stage 2. The cost of assigning points is cumulative. For example, if a participant distributes 2 points in the second stage to another participant, she will face a cost of 2 ECUs in the second stage. If in period 3 she decides to distribute 3 more points to the same participant, then the total cost in stage 3 is 9 ECUs. The total income from stage 3 is as follows:
Total income at the end of stage 3 = (Income from the stage 2)*[1 – (1/10)*received points] – total cost of distributed points
If participants make a negative income in stages 2 or 3, they will pay us back with the 25 ECU they received as a lump-sum payment. At the end of the experiment, we will calculate the total income participants made in the 20 rounds. If they made a total negative income in some rounds, they should pay us back with the 25 ECUs they received as a lump-sum payment. We will convert the total income to dollars and those will be their earnings of participating in the experiment, plus the show-up fee.