The Causal Effect of Income Growth on Consumer Social Responsibility

We investigate, in two studies, whether income growth causes an increased concern for mitigating negative externalities from consumption.

Study 1:
We conduct experimental markets, where firms and consumers can exchange products that differ in their social impact, with products that impose a smaller externality on third parties also costing more to produce. The experiment comprises 30 periods, with the first 10 periods (“Part I”) corresponding to a baseline design that is identical across all treatments. To study the effect of an exogenous increase in income on socially responsible market behavior, our treatments introduce varying positive shocks to consumers’ incomes in periods 11-30 (“Part II”).

Treatments:
Baseline: Consumers' incomes are unchanged in Part II.
Medium: Consumers' incomes are increased to 200 experimental points in Part II, from a baseline level of 100 points.
High: Consumers' incomes are increased to 400 experimental points in Part II, from a baseline level of 100 points.
Unequal: Two consumers' incomes are increased to 400 experimental points in Part II, from a baseline level of 100 points, while the income of the remaining four consumers (there are always six consumers in a market) remains unchanged at a level of 100 points.

Study 2:
Study 2 replicates the design of Study 1, but changes two features. First, we change the impact of the externality to affect a charity fighting climate change and poverty in low-income countries. Second, in one of the treatments, we additionally keep the relative income of all laboratory subjects—consumers and firms—constant, by giving all of them the same income shock.

Treatments:
Baseline: Consumers' incomes are unchanged in Part II.
High (Consumers): Consumers' incomes are increased to 400 experimental points in Part II, from a baseline level of 100 points.
High (Consumers & Firms): Consumers' and Firms' incomes are increased to 400 experimental points in Part II, from a baseline level of 100 points.

2016-05-10

2019-04-30

Measure of socially responsible behavior: percentage of total potential loss that is mitigated through consumers’ product purchases

Study 1:
Each experimental market comprises 18 participants: six firms, six consumers and six passive third parties. The participants and roles in a market are fixed across all 30 periods of the experiment. In the initial 10 periods every firm, consumer and third party receives an income of 100 points. Firms and consumers can earn additional points by trading products, with products of varying types having different production costs and varying impacts on third parties.

At the beginning of a market period, every firm selects a product type and a price. A product’s type corresponds to the total loss it imposes on third parties when purchased, which is between 0 and 60, and a corresponding production cost. The total loss is divided equally and imposed on each of the six third parties. Products that impose a smaller externality on third parties also cost more to produce. Specifically, a decrease in the combined loss to third parties of six—and, therefore, a decrease of one for the loss imposed on each third party—increases the production cost by one.

At the same time as they select product types, firms also determine prices for their product offers. Products are worth 70 to consumers, independently of the degree of externality they impose; the ability to hold constant the characteristics of a product, other than its social impact, is a valuable element of the control afforded by a laboratory environment. Firms are required to set prices between the production cost of the selected product type and the value of the product.

Firm’s offers are conveyed to consumers in a posted-offer market. After firms make their decisions, consumers see the prices and types of the six products offered in that period. Offers are displayed in a random order. Each consumer can buy one product but can also decide not to buy any product. A decision not to buy a product yields no profits for either the consumer or any firm, but also means no losses for third parties. There is no capacity constraint on the supply side; that is, each firm can serve the entire market and sell up to six units of the offered product.

The third parties are passive participants and do not make any decisions. However, their payoffs in a period are impacted by the types of products exchanged in the market. Specifically, each third party experiences a loss between 0 (whenever all consumers either only buy products that produce no loss or do not buy products at all) and 60 (whenever all consumers buy products that produce the maximum possible loss).

At the end of every period, players observe their own payoff. In addition, firms observe the offers made by all firms, how many products they sold, their payments and the impact of the products they sold on third parties. Consumers observe the effect of their purchasing decision on the payments of the six third parties. Individual subjects are not identified to one another—i.e., there are no identification numbers associated with feedback—and therefore cannot track each other’s actions across periods.

Study 2:
Experimental markets comprise 12 participants: six firms and six consumers. For each 12-person market, we allocate an initial donation of 360 points (corresponding to CHF 120) to the charitable organization, Carbon Offsets To Alleviate Poverty (see https://cotap.org/). This organization funds programs that fight climate change and poverty. However, the size of the actual resulting donation could change depending on the type of products exchanged in the market. As in Study 1, each possible product type corresponds to a particular external impact—in this case, a reduction in the size of the donation, and its corresponding cost.

Treatments were randomized to sessions by the experimenters. Subjects were randomized to roles (firms, consumers, third parties) by drawing numbers from a deck upon arrival at the lab.

Between-subject randomization to treatment at the session level.

Yes

Study 1:
Treatment Baseline: 10 markets
Treatment Medium: 10 markets
Treatment High: 6 markets
Treatment Unequal: 16 markets

Study 2:
Treatment Baseline: 6 markets
Treatment High (Consumers): 6 markets
Treatment High (Consumers & Firms): 6 markets

Study 1: 756 subjects participated, in 42 independent markets. Study 2: 216 subjects participated, in 18 independent markets.

Study 1:
Treatment Baseline: 60 consumers
Treatment Medium: 60 consumers
Treatment High: 36 consumers
Treatment Unequal: 32 consumers with high income and 64 consumers with low income

Study 2:
Treatment Baseline: 36 consumers
Treatment High (Consumers): 36 consumers
Treatment High (Consumers & Firms): 36 consumers