Experimental evidence on sharing rules and additionality in transfer payments

This study presents experimental evidence on the effectiveness of alternative institutional arrangements designed to allow providers of public good services to be subsidized by non-providers. The decision setting is a repeated linear public good game with two groups, insiders and outsiders. Insiders make contributions to a public good that benefits both insiders and outsiders. Outsiders, unable to provide the public good, can send transfers to compensate insiders. The institutions under consideration are motivated primarily by payments for ecosystem services (PES), such as payments for climate protection. The decision settings, however, capture attributes of many forms of charitable giving. Results are presented from two studies. Study 1, based on a 2x2 design, considers two sharing rules for group payments and whether an additionality criterion is present or not. With the equal sharing rule, insiders receive an equal share of transfers. With the proportional rule, insiders receive a share of transfers proportional to their relative contributions in their group. When the additionality criterion is present, transfers are received contingent on insiders providing the public good at a level higher than in initial decision periods, where a transfer option is not present. Study 2 examines a setting where individual outsiders are able to target transfers to individual insiders, allowing outsiders to endogenously choose the specific distribution of transfers among the insiders. The sharing rules studied result in significant differences in cooperation levels. Both the proportional share and targeted-transfers rules lead to greater public good provision relative to the equal share rule. Contrary to its alleged relevance to PES programs, additionality does not lead to sustained increases in public good provision. On the other hand, additionality may improve the cost-effectiveness of transfer programs by precluding transfer payments when subsidies do not increase public good provision.