Tuesday, August 11, 2009

Public good provision and crowding out of market provision

Here's a new paper from Andrew Reeson and John Tisdell, I am unfamiliar with them but I like the idea, emphasis is mine:

"There are many factors which can motivate people to contribute to public goods. These range from intrinsic motivations such as altruism, through social motivations such as concerns for fairness and approval, to extrinsic incentives which include sanctions and payments. Institutions help determine how these motivations are applied and expressed. Psychological studies indicate that extrinsic incentives can crowd out the intrinsic motivations which prompt voluntary contributions to public goods. We applied experimental economics techniques to examine how people in a public good dilemma respond to changing institutions. Our results showed that the introduction of formal institutions (a regulation and competitive tender) crowded out voluntary contributions, with the supply of public good increasing less than anticipated, and in some circumstances actually decreasing. In particular, the introduction of the competitive tender triggered a ‘market instinct’, with participants who previously had been expressing social preferences now seeking to maximise profits. The effects of crowding out persisted even after an institution was removed, suggesting that it may be difficult to reverse. We conclude that policy makers should tread carefully when considering formal institutions to promote public good provision, particularly where desired actions are already occurring voluntarily to some extent."

The story goes that markets fail to provide public goods, so governments step in and provide it. Public choice seems concerned with how that level is determined, why it's likely wrong, why it's likely to persist and why it's popular at the polls. But there should be more attention paid to the market-destroying aspect of public activity-- in this case, of providing public goods.


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