Taxation, redistribution and observability in social dilemmas

By: Daniel A. Brent (Department of Economics, Louisiana State University, Business Education Complex, Baton Rouge, LA 70803-6306, U.S.A.) ; Lata Gangadharan (Department of Economics, Monash University, Clayton, Australia) ; Anca Mihut (Univ Lyon, CNRS, GATE L-SE UMR 5824, F-69130 Ecully, France) ; Marie Claire Villeval (Univ Lyon, CNRS, GATE L-SE UMR 5824, F-69130 Ecully, France)
In the presence of social dilemmas, cooperation is more difficult to achieve when populations are heterogeneous because of conflicting interests within groups. We examine cooperation in the context of a non-linear common pool resource game, in which individuals have unequal extraction capacities and have to decide on their extraction of resources from the common pool. We introduce monetary and nonmonetary policy instruments in this environment. One instrument is based on two variants of a mechanism that taxes extraction and redistributes the tax revenue. The other instrument varies the observability of individual decisions. We find that the two tax and redistribution mechanisms reduce extraction, increase efficiency and decrease inequality within groups. The scarcity pricing mechanism, which is a per-unit tax equal to the marginal extraction externality, is more effective at reducing extraction than an increasing block tax that only taxes units extracted above the social optimum. In contrast, observability impacts only the Baseline condition by encouraging free-riding instead of creating moral pressure to cooperate.
Keywords: Common Pool Resource game, taxation mechanisms, observability, cooperation, heterogeneity, experiment
JEL: C92 H23 D74
URL: http://d.repec.org/n?u=RePEc:gat:wpaper:1726&r=ltv
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