Impact of Risk and Uncertainty in the Provision of Local and Global Environmental Goods: An Experimental Analysis

University of Melbourne Department of Economics Research Paper No. 956

36 Pages Posted: 7 Aug 2007

See all articles by Lata Gangadharan

Lata Gangadharan

University of Melbourne - Department of Economics

Veronika Nemes

Government of Victoria - Department of Sustainability and Environment

Date Written: November 1, 2005

Abstract

Uncertainties and risks in the decision making process are abundant in the area of environmental economics, irrespective of whether the problems being discussed are local or global. This paper uses laboratory evidence from public goods games to examine how in payoff equivalent situations, decision makers contribute towards local or global environmental goods, in the presence of risk and uncertainties in the provision of these goods. We use a within subject design that allows for comparisons across seven different treatments in which subjects are exposed to internal strategic) and external (environmental) risk and uncertainty. Our results show that the location of the risk and uncertainty matters, with subjects moving away from the external uncertainty in favor of internal uncertainty, when that uncertainty is associated with the local environmental good. When the uncertainty relates to the global environmental good, subjects face both external and internal uncertainty on the same good leading to a significant drop in contributions. We find that in the presence of risk and uncertainty subjects use feedback from other members of their group when deciding about future contributions. The reward for research and development and innovation is captured in the experimental design by the increased probability of obtaining the desired outcome in the endogenous probability treatment. Subjects seem to understand this incentive and contribute more towards global goods in this treatment.

Keywords: Experiments, Public Goods, Local and Global Environmental Problems, Risk, Uncertainty

JEL Classification: C91, Q00, H41

Suggested Citation

Gangadharan, Lata and Nemes, Veronika, Impact of Risk and Uncertainty in the Provision of Local and Global Environmental Goods: An Experimental Analysis (November 1, 2005). University of Melbourne Department of Economics Research Paper No. 956, Available at SSRN: https://ssrn.com/abstract=995652 or http://dx.doi.org/10.2139/ssrn.995652

Lata Gangadharan (Contact Author)

University of Melbourne - Department of Economics ( email )

Victoria, 3010
Australia
+61 3 9344 5408 (Phone)
61 3 8344 6899 (Fax)

Veronika Nemes

Government of Victoria - Department of Sustainability and Environment ( email )

8 Nicholson Street
East Melbourne, VIC
Australia

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