local environmental control and institutional...

Local Environmental Control and Institutional

Crowding-Out

JUAN CAMILO CARDENASUniversidad Javeriana, Bogota, Colombia

JOHN STRANLUNDUniversity of Massachusetts, Amherst, USA

and

CLEVE WILLIS *

University of Massachusetts, Amherst, USA

Summary. Ð Regulations that are designed to improve social welfare typically begin with thepremise that individuals are purely self-interested. Experimental evidence shows, however, thatindividuals do not typically behave this way; instead, they tend to strike a balance between self andgroup interests. From experiments performed in rural Colombia, we found that a regulatorysolution for an environmental dilemma that standard theory predicts would improve social welfareclearly did not. This occurred because individuals confronted with the regulation began to exhibitless other-regarding behavior and made choices that were more self-interested; that is, theregulation appeared to crowd out other-regarding behavior. Ó 2000 Elsevier Science Ltd. Allrights reserved.

Key words Ð institutional crowding-out, external regulation, local environmental quality,

experiments, South America, Colombia

1. INTRODUCTION

Economic institutions are designed to alterbehavior, to stimulate actions intended toproduce outcomes that are socially superior tothose expected to ¯ow from self-regarding in-dividual choices. A small empirical literaturesuggests, however, that institutions designed toinduce Pareto-superior outcomes may a�ect

individual choices in surprising and contraryways. In this paper we present results from aseries of experiments designed to study the ef-fects of external regulatory control of localenvironmental quality. We ®nd that subjectsmade themselves worse-o� when they faced amodestly enforced government-imposed regu-lation that standard theory would predictto be welfare-improving. The reason for this

World Development Vol. 28, No. 10, pp. 1719±1733, 2000Ó 2000 Elsevier Science Ltd. All rights reserved

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* Financial support for the ®eld work was provided by

the MacArthur Foundation, the Instituto de Investiga-

cion de Recursos Biologicos Alexander von Humboldt,

the WWF Colombian program, and Fundacion Natura,

Colombia. In the United States, the research was

supported by the Cooperative State Research, Exten-

sion, Education Service, US Department of Agriculture,

Massachusetts Agricultural Experiment Station, under

Project No. 799, Manuscript No. 3256, and by a

Resources for the Future dissertation grant. We are

indebted for helpful advice and suggestions to Sam

Bowles, James Murphy, Je� Carpenter, James Walker,

Elinor Ostrom, and Ernst Fehr, and absolve them from

responsibility for any shortcomings that remain. In

Colombia we must thank the ®eld practitioners and

fellows from Humboldt, WWF and Fundacion Natura

who helped pre-test and conduct the experiments. Very

special thanks are due Luis Guillermo Baptiste and

Sara Hernandez at Humboldt, Carmen Candelo at

WWF and Juan Gaviria, Nancy Vargas and Danilo

Salar at Natura. Final revison accepted: 5 February

2000.

1719

mystifying result appears to be that when sub-jects were confronted with a regulatory con-straint on their behavior, they tended, onaverage, toward purely self-interested behavior(that is, toward pure Nash strategies), while inthe absence of regulatory control their choiceswere signi®cantly more group-oriented.

We are by no means the ®rst to suggest thatinstitutions designed and expected to do goodmight actually engender contrary behavior. Anumber of authors have suggested that payinga monetary reward to motivate socially desir-able behavior may actually do the oppositebecause it may crowd out an individualÕs senseof public-spiritedness. Titmus (1971) suggestedthat individuals donate blood more willinglywhen they do so purely voluntarily than whenthey are o�ered money for their donations. 1 Inthe environmental arena, Frey and Oberholzer-Gee (1997) found that Swiss residents werewilling to accept nuclear waste disposal in theircommunity purely out of a sense of publicspiritedness about twice as frequently as whenthey were o�ered compensation for acceptingthe negative externality. Kunreuther and East-erling (1990) found a similar phenomenon inNevada; raising tax rebates failed to engendersupport for siting a nuclear waste facility atYucca Mountain near Las Vegas.

Evidence that regulatory institutions maycrowd out public motivations in favor ofgreater self-interest is not limited to the e�ectsof monetary incentives. Ostman (1998) suggeststhat external control of common pool resourcesmay have a negative e�ect by shifting respon-sibility to the regulatory agency and essentiallyabsolving individuals from other-regardingmoral obligations. Frolich and Oppenheimer(1998) designed a series of experiments to op-erationalize RawlsÕ (1971) ``veil of ignorance''in the context of private contributions to a purepublic good. In addition to a standard contri-bution game, subjects played a game in whichtheir payo�s resulted from a random reassign-ment of individual payo�s. This veil over thelink between individual choices and payo�sforced subjects to consider the consequences oftheir choices on the payo�s of the rest of theirgroup. Indeed, the game was designed so thatrandomizing the assignment of payo�s gener-ated a dominant strategy to contribute the ef-®cient amount to the public good. As predicted,subjects did contribute signi®cantly more to thepublic good than under the standard treatment.More important, however, they also foundstrong evidence that the institution of random

payo�s shifted individual motivations towardgreater self-interest despite the fact that theinstitution was designed to force a strongergroup-orientation. Put simply, the institutionserved its intended purpose, but it seemed tocrowd out other-regarding preferences. 2

We are interested in examining the e�ects ofexternal institutions (rules and regulations im-posed from outside a community) on behaviorin an experimental setting, in particular thee�ects of external control of environmentalquality in rural settings of the developingworld. Our design has a number of features,which combine to make it rather unique. (Thedetails of our experimental design are providedin Section 2.) First, rather than conductingexperiments in a laboratory setting, our exper-iments are conducted in three rural villages ofColombia, South America. Second, we con-sciously designed our experiments to approxi-mate an environmental quality problem thatrural villagers in developing countries are likelyto face. Speci®cally, subjects were asked to de-cide how much time they would spend collect-ing ®rewood from a surrounding forest, whilerealizing that this activity has an adverse e�ecton local water quality because of soil erosion.Third, we confront a subset of subjects with agovernment-imposed quota on the amount oftime that can be spent collecting ®rewood. Thequota is only modestly enforced, which is typ-ical of command-and-control environmentalpolicies that rural villagers in the developingworld actually face. Despite the weak enforce-ment of the quota, standard economic theorypredicts that the external control will producemore e�cient choices.

We consider two treatments to examinewhether external control of local environmentalquality may crowd out group-oriented behav-ior. Each group of subjects plays a number ofinitial rounds of the game without regulationand without being able to communicate witheach other. A subset of groups go on to playadditional rounds in which they are confrontedwith the government-imposed regulation. Theother groups also play additional rounds, butinstead of facing an external regulation, indi-viduals are allowed to communicate with othersin their group between rounds.

Allowing some groups to communicate wasmotivated by the fact that local cooperativee�orts are frequently the alternative to externalregulation in developing countries. Moreover,by the fact that relatively more is known aboutthe role of face-to-face communication in

WORLD DEVELOPMENT1720

enhancing levels of cooperation in experimentsof this general type. Much of the literature onthis subject is summarized by Ostrom, Gardnerand Walker (1994), and Ledyard (1995). Inbrief, the ®ndings show that communicationenhances the likelihood of individuals shiftingfrom relatively self-interested decisions to moregroup-oriented ones.

In Section 3 we report our results. Consistentwith ®ndings of the experimental literature oncontributions to public goods and exploitationof common properties (Ledyard, 1995; Ostrom,1998), we ®nd that when subjects do not faceexternal restrictions and cannot communicatewith each other, their decisions tend to be nei-ther pure Nash strategies nor e�cient choices,but somewhere between these extremes. Absentregulation, the simple ability to communicateallows individuals to make more e�cientchoices. But, our results about the e�ects ofexternal regulation are newÐsurprisingly, reg-ulatory control caused subjects to tend, on av-erage, to make choices that were closer to theirpure Nash strategies. Consequently, averageindividual payo�s were lower than in the ab-sence of regulation, and much lower than thepayo�s of those subjects who were simply al-lowed to communicate with each other, in spiteof the fact that the regulatory institution wasdesigned to induce more e�cient choices.

Institutional crowding-out suggests that well-intentioned but modestly enforced governmentcontrols of local environmental quality andnatural resource use may perform ratherpoorly, especially as compared to informal lo-cal management. In Section 4 we discuss thisand other implications of the crowding-oute�ect, as well as suggest ways in which this lineof research should be extended.

2. EXPERIMENTAL DESIGN

As noted in the introduction, we designedour experiments to confront our subjects with asocial dilemma concerning environmentalquality, the structure of which would closelymimic their actual experiences. Toward thatend, our ®eld experiments were undertakenduring the summer of 1998 in three areas inColombia. The speci®c locations were chosenbecause they each have predominantly ruralpopulations with signi®cant interests in localnatural resources and environmental quality. Inaddition, payo�s for the game were generatedfrom a model of individual e�orts to collect

®rewood from local forests. Private and socialinterests diverge in the model because we as-sumed that higher levels of ®rewood extractionwould heighten soil erosion and ultimatelydamage local water quality. We consciouslyframed our experiment so that the subjects werefully aware that they were playing a game withthis speci®c relationship between ®rewood ex-traction and water quality in place.

(a) The subjects

In the Colombian village of Encino, locatedin the eastern Andean region, residents enterlocal tropical cloud forests to extract ®re-wood, log timber on a small scale, and tohunt. Like all of the sites we visited, water forconsumption and irrigation comes nearly un-treated from local rivers. Of the three areasthat we visited, the relationship between forestcover and water quality is most critical inEncino, and the residents of this village areacutely aware of the problem. Water qualitydegradation caused by forest cover losses isless severe in the villages of Circasia andFilandia in the Quindio co�ee region in themid-Andes; it is nevertheless a signi®cantproblem. In Quindio, subjects for our experi-ments were drawn speci®cally from a group offamilies whose livelihood is related to theextraction and processing of natural ®bersfrom local forests. As in Encino, water isdrawn from local rivers and residents areaware that extracting forest products can leadto lower water quality. In Nuqui, located onthe Paci®c coast, villagers harvest coastalmangroves for ®rewood and other woodproducts, but their water comes from furtherinland; hence, they do not experience a directlink between their exploitation of localsources of wood and water quality. They facea similar dilemma, however, because theirexploitation of the mangroves for wood ad-versely a�ects coastal ®sh populations uponwhich they also depend.

To sum up, the population from which thesubjects for these experiments were drawnconsists of rural households that live in areasthat depend heavily on local forests for woodproducts. In each location, exploitation of localforests a�ects another aspect of their liveli-hoods adversely: water quality in Encino andQuindio, and ®sh populations in Nuqui. Hence,the subjects face social dilemmas in their dailylives that are similar to the one we confrontthem with in the experiments. In each of the

ENVIRONMENTAL CONTROL AND INSTITUTIONAL CROWDING-OUT 1721

three settings, the participants generally kneweach other well, having lived in the same villagefor most of their lives. Schooling, age and in-come levels varied signi®cantly for the partici-pants within each group. Most participants hadfewer than six years of schooling, roughly halfwere between 30 and 50 years old, and all were16 or older.

(b) Payo�s

The payo�s for our experiments were gener-ated by a simple model of a ®xed number ofhomogeneous individuals that exploit a localforest for ®rewood. In each round of the games,each individual is given an endowment of time ethat can be allocated to collecting ®rewood orto providing labor to an unrelated market. Letxi denote the amount of time individual ispends collecting ®rewood from the common,and let w denote the prevailing wage for labor.Then, i's decision to provide �eÿ xi� units oflabor to the formal sector yields a payo� ofw� �eÿ xi�. Time spent collecting ®rewoodfrom the forest yields a private bene®t, whichwe assume takes the quadratic form g�xi� �cxi ÿ /�xi�2=2, where c and / are strictly posi-tive and are chosen in part to guaranteeg�xi� > 0, for xi 2 �1; e�. The strict concavity ofg�xi� indicates diminishing marginal privatereturns to time spent collecting ®rewood.

Subjects were told explicitly that their deci-sion to spend time extracting ®rewood woulda�ect water quality in the area adversely. Weassumed that water quality q is a quadraticfunction of the aggregate amount of time in-dividuals in the community spend collecting®rewood; speci®cally, q�P xj� � q0 ÿ b�P xj�2=2, where b > 0, and q0 is interpreted to be waterquality in the absence of ®rewood extraction.Again these parameters are chosen in part toguarantee q�P xj� > 0 for all feasible �P xj�.An individualÕs valuation of water quality isf �P xj� � aq�P xj�, where a is another positiveconstant.

De®ne u�xi;P

xj� to be the sum of thesources of utility for an individual exploiter ofthe local forest. Parameters were chosen, inpart, to guarantee that u�xi;

Pxj� > 0 for all

possible xi andP

xj. To facilitate scaling indi-vidual payo�s, we take an individualÕs payo�function to be a positive, monotonic transfor-mation F of u. In particular, F �u� � �lg=d��u�g,where l, d, and g are all positive constants. AnindividualÕs payo� function is then

U xi;X

xi

� �� lg=d� f

Xxj

� �h� g�xi� � w�eÿ xi�

ig

� �lg=d� a q0

��ÿ b

Xxj

�2� �

2

�� cxi ÿ /�xi�2=2� � w�eÿ xi�

�g

: �1�

Each group consisted of n� 8 subjects, andeach subject was allocated e� 8 units of time ineach round. Pre-testing of the experimentaldesigns at the Humboldt Institute for Biodi-versity in Villa de Leyva, Colombia, led us todenominate units of time as months per year.Scale concerns led us to choose the followingremaining parameter values: w� 30; c� 97.2;/� 3.2; q0� 1372.8; b� 1; a� 1; l� 2;d� 16,810 and g� 2. Individual payo�s weretherefore calculated from the payo� function

U xi;X

xi

� �� 4=16;810� 1372:8

�ÿ

Xxj

� �2�

2� 97:2xi

ÿ 3:2�xi�2=2� 30�8ÿ xi��2

: �2�

Subjects were given a table of payo�s (Figure 1,excluding the highlighting of some of the cells)as a function of individual choices and thechoices of all other participants.

(c) Nash strategies and the balance betweenself-interested and other-regarding behavior

Because extracting ®rewood generates a purepublic bad in the form of lower water quality,standard theory predicts that purely self-inter-ested individuals will spend more time har-vesting ®rewood than is socially optimal.Indeed, one common reference point for ex-periments of this type is the one-shot, complete-information Nash equilibrium (the standardmodel of purely self-interested strategic be-havior) and another is the outcome at whichgroup welfare is maximized. Although we donot ignore these benchmarks, we believe thatfor an investigation of whether external controlson individual behavior crowd out group-orientedbehavior, a more appropriate benchmark are theindividualsÕ pure Nash strategiesÐthat is, indi-vidual payo�-maximizing choices taking thechoices of the rest of the group as ®xed. In fact,we take the di�erence between an individualÕs


Nash best-response to the choices of the otherplayers in the group and his or her actualchoice to be an indicator of how that individualbalances self-interests and those of the entiregroup.

To illustrate the point, suppose there areeight players and each of seven players choosesto spend two months collecting ®rewood fromthe surrounding forest. Since the sum of theseven playersÕ choices is 14 months, Figure 1indicates that the eighth playerÕs payo�-maxi-mizing responseÐthe individualÕs Nash best-responseÐis to spend eight months collecting®rewood. (We have highlighted the cells inFigure 1 that indicate an individualÕs pure Nashstrategy, although these cells were not high-lighted for the participants.) This choice ismade purely out of self-interest, without regardfor the welfare of the others in the group. Notethat player eightÕs payo� in this outcome is 776points, while each of the other seven receive 535points (for each of them, the sum of the othersÕchoices is 20 months, while they choose twomonths).

Now imagine that the eighth player choosesthree months instead of eight, while the otherseven players continue to choose two months.We consider this to be a signi®cantly moregroup-oriented choiceÐit is costly because thatplayerÕs payo� is now 652 points instead of 776:however, each of the other playersÕ payo�s in-crease from 535 points to 606 (for each of them,the sum of the othersÕ choices is now 15months, while they choose two months). Muchof our analysis in Section 4 is based upon thedi�erences between the playersÕ actual choicesand their Nash best-responses: choices that areclose to Nash responses indicate relatively self-interested behavior, while those that are furtheraway indicate stronger other-regarding behav-ior.

As for the standard benchmarks, it isstraightforward to show that in our design theoptimal amount of time each individual shouldspend collecting ®rewood is one month. 3 Onthe other hand, since a pure strategy Nashequilibrium requires that every playerÕs choicebe a best-response to every other playerÕs best-response, in this context the Nash equilibriumis reached if every individual decides to spendsix months collecting ®rewood from the nearbyforest. It is worth noting that at the Nashequilibrium, subjects earn only about 24% ofthe payo�s attainable in the e�cient outcome.

As noted in the introduction, we confront asubset of groups of subjects with a quota on the

amount of time that can legally be spent col-lecting ®rewood and an inspection/penaltyprotocol to enforce compliance to the quota.The e�ect of this regulation on the relativebalance of self-interested and other-regardingbehavior is the primary focus of this work.Suppose that the quota is s. An audit of anindividualÕs activities occurs with probability p.An individual found to have spent xi > s timecollecting ®rewood in a particular period facesa penalty p on every unit of time in excess of s.Thus, a participant faces an expected penalty ofpp(xi ) s). Assuming risk-neutrality, the Nashstrategy for an individual in this treatmentmaximizes U�xi;

Pxi� ÿ pp�xi ÿ s�. Since the

expected penalty is an additional cost of col-lecting ®rewood, individuals should choose tospend less time collecting ®rewood than theywould in the absence of any regulation.

Under the regulation-with-enforcement treat-ment, we chose the individual quota s to bethe e�cient choice; that is, s� 1. We chose theprobability of an audit to be p� 1/16, and theunit penalty for exceeding s� 1 to be p� 100;therefore, the subjects faced an expected mar-ginal penalty for violating the standard ofpp� 100/16� 6.25. This enforcement regime israther weak in the sense that the expectedmarginal penalty is not su�cient to induce risk-neutral players to comply with the quota. Wechose a relatively weak enforcement protocolbecause we believe that weak enforcement bestcharacterizes the state-imposed regulations oursubjects actually encounter. In rural commu-nities of developing countries like those whereour experiments were conducted, monitoringand enforcement of state and federal regula-tions is likely to be quite lax because of highmonitoring costs and limited budgets. 4

Assuming risk neutrality, we have calculatedthe expected individual payo�s under our reg-ulation-with-enforcement treatment, in whichexpected penalties are subtracted from gains,and show them in Figure 2. 5 (Subjects werenot given this table.) Again, the highlightedcells indicate Nash responses to the choices ofall the other players: these responses form thebenchmark that indicates the balance betweenself-interested and other-regarding behaviorwhen the subjects face the regulatory control.As expected, for most aggregate choices of timespent in the forest by others, the Nash best-response is lower than in the absence of regu-lation. In fact, the Nash equilibrium is reachedwhen each player chooses to spend ®ve units oftime harvesting ®rewood as opposed to six


Figure 1. Individual payo�s and Nash responses.


Figure 2. Expected payo�s and Nash responses under regulation.


units in the Nash equilibrium absent the regu-latory control. It is worth noting that at theregulatory Nash equilibrium with risk-neutralsubjects, an individualÕs expected payo� is 268points. Because the enforcement protocol is tooweak to induce perfect compliance to the quo-ta, this value is about 42% of individual payo�sobtainable in the e�cient outcome. But, sincethe regulation is intended to induce more e�-cient choices, each individualÕs expected payo�is about 73% higher than the Nash equilibriumpayo�s in the absence of regulation.

(d) The experiments

Each session of the experiment involved eightsubjects and two monitors. The subjects sat atindividual desks that were distributed in a circlewith enough separation between the desks sothey could not look at anotherÕs work. Exceptin periods when communication was allowed,the desks faced away from the center of thecircle. In each round, each subject wouldchoose how many units of time, xi 2 �0; 8�, tospend collecting ®rewood from a local forest.Subjects were given the payo�s table (Figure 1without the shading) and they knew that theother participants consulted the same table.Thus, although individuals could not know inadvance what the others would choose, theyknew that their decisions were based on thesame payo�s. Once a subject made a decisionfor a particular round, this decision was writtenon a slip of paper. When all subjects had madetheir decisions, a monitor collected each slip ofpaper and gave them to another monitor whorecorded the individual decisions and calculat-ed the total for the group. This total was an-nounced to the subjects, who then determinedtheir own payo�s from the payo�s table. Sub-jects kept a record of their own payo�s as acheck on the monitorÕs record.

Each session began with some welcomingremarks within which the subjects were toldthat the session would last approximately twohours. A monitor would then read the in-structions to the participants. (The instructionsare available from the authors.) Results frompre-tests of the experiment led us to decide notto give the subjects written instructions becauseof the wide variation in levels of literacy amongthe subjects. The instructions explained thebasic setting of the game, how points wereearned, how these points were converted tocash at the end of the session, and the proce-dures of the game. The instructions included

three di�erent examples to familiarize the sub-jects with the payo�s and the procedures. Twopractice rounds were conducted. The monitorasked for questions at several points, and whenthere were no further questions the game beganwith round one. Large, readable posters of thepayo� table, the forms the subjects used duringthe game, and the examples from the instruc-tions were placed on one wall of the ``®eld lab.''

In total, 14 groups from three villages playedtwo treatments of the game. Each of the 14groups played 8±11 initial rounds of the game.During these initial rounds individuals madetheir choices without communicating with theothers in their session or with the monitors. Thesubjects did not know how many rounds wouldbe played. After the initial rounds the monitorswould stop the game and announce a new set ofrules for the forthcoming rounds. At the be-ginning of the session, the subjects were nottold that the rules would change at some pointin the session.

(i) Communication treatmentAfter the initial rounds, nine groups were

told that they could now communicate witheach other between rounds for three minutes.Between rounds the subjects turned their deskstoward each other. They could talk to eachother about anything, but they could notthreaten others or agree to transfers of cash atthe end of the game. Once three minutes hadpassed, the subjects were required to turn theirdesks back around and make their individualchoices in private. These groups played addi-tional 9±12 rounds in this way.

(ii) Regulation treatmentThe other ®ve groups were not allowed to

communicate after the initial rounds. Insteadthey faced a regulation that stipulated theyshould spend no more that one unit of timecollecting ®rewood from the forest in eachround. They were told that after all had madetheir choices in a round, there was a one chancein two that one of them would be selected foran audit to verify compliance with the rule.After all had submitted their choices for theround and the aggregate amount of time spentin the common was announced, a die was rolledto determine whether an inspection would oc-cur that period. An inspection would take placeonly if an even number came up. To determinewhich individual would be inspected if an evennumber was rolled, a number between one andeight would be drawn from a hat and that


personÕs choice would be audited. Thus theprobability that any one player would be au-dited for a particular round was 1/16. Once aplayer was chosen to be audited, a monitorwould walk to that personÕs desk and check forcompliance. If the audited player was found tobe in violation for that round, a penalty of 100points per unit of time above the time quotawould be subtracted from that playerÕs payo�for that round. Although the other playersknew that an audit had been conducted andwho had been audited, they did not knowwhether a penalty was assessed, nor the extentof the penalty. These groups played an addi-tional 9±12 rounds under these rules.

At the end of each session, total points foreach individual were calculated. Subjects werepaid that number in pesos for their participa-tion. For the villages in which the experimentswere conducted, a daily minimum wage cen-tered around 7,000 pesos (about US $5.40 atthe time). Including practice rounds, mostparticipants engaged in 20 rounds of decisions.If all subjects made the e�cient choice in eachround, they would have each earned about12,900 pesos (approximately $11.73 US) in theexperiment. Average earning for the experi-ments was 7,884 pesos.

3. RESULTS

We begin the analysis of the experimentaldata by considering average choices. Figure 3and the third column of Table 1 summarize theaverage decisions made by 112 participantsformed into 14 groups of eight villagers each.Nine of these groups (denoted COM) wouldultimately be allowed to communicate betweenrounds after 8±11 rounds of not being able tocommunicate. The other ®ve groups (denotedREG) would be subject to the imperfectly en-forced time quota, x � 1, after 8±11 rounds ofno communication. As indicated earlier, weended the ®rst and second stages at di�erentpoints to be sure that terminal rounds couldnot be anticipated. For the ®rst stage, wetherefore consider only the ®rst eight rounds of®rst-stage decisions for each group. All groupsplayed nine rounds in the second stage, andsome a few more; therefore, we consider onlythe ®rst nine rounds of second-stage decisionsfor each group.

On the left portion of Figure 3 are depictedthe average decisions of the participants in

the two collections of groups for the eightrounds before they either were allowed tocommunicate or were faced with the regula-tion. Clearly, the Nash equilibrium (x � 6 foreach subject) was not reached, nor did thee�cient solution �x � 1� obtain. The averageover the eight rounds for the nine groups whowould later communicate was 4.39, and forthe other groups, 4.32. Furthermore, Figure 3suggests that average choices were relativelystable throughout the ®rst stage for bothsets of groups. As one would expect withrandomly formed groups and identical exper-iments, there was no statistical di�erencebetween the two sets of groups (Table 1, row 1,column 3).

The second-stage results for the groups thatfaced the time quota are quite interesting.Figure 3 shows that in the ®rst round after therule was introduced, average time spent col-lecting ®rewood plunged to below two. But asthe players became comfortable with the quotaand the weak consequences of exceeding thequota, and as they understood that others werealso violating the regulation, average choicesrose over the rounds to exceed four units oftime collecting ®rewood. The erosion of thein¯uence of the regulation is unmistakableÐifone compares the ®nal three rounds of the ®rstand second stages, one ®nds no statistical dif-ference in average choices (Table 1, row 3a,column 3), indicating that by the end of thesecond stage the regulation had no e�ect onaverage choices. Furthermore, the averagechoice of those facing the regulation for the®rst three rounds of the second stage was 2.60,while for the ®nal three rounds it was 4.13, astatistical and sizable di�erence (Table 1, row4a, column 3).

In contrast, the communication groups wereable to make more e�cient choices. The aver-age choice of these subjects shows a statisticallysigni®cant decline in months of e�ort to extract®rewood from 4.39 for all rounds in the ®rststage (in which they could not communicate) to3.53 after communication was allowed (Table1, row 2b, column 3), an indication of greatercooperation. Comparing the ®nal three roundsbefore communication with the ®nal threecommunication rounds shows a similar reduc-tion (Table 1, row 3b, column 3). Moreover,unlike the regulation groups, that social im-provement was relatively stable from the earlysecond stage rounds to the last; there isno statistically signi®cant di�erence betweenthe mean choice for the ®rst three rounds


after communication and for the mean choicefor the ®nal three rounds (Table 1, row 4b,column 3).

Although the snapshot provided by analyz-ing average choices is illuminating, it does nottell us much about how institutions a�ect the

Table 1. Summary of statistical testsa

Situation Cases Averagemonths

p-value Averagedeviations

p-value Averageearnings

($)

p-value

1. COM vsREG, ®rststage

COM (allrounds)

4.39 3.19 370

REG (allrounds)

4.32 0.76 3.20 0.85 377 0.54

2a. REG First stage (allrounds)

4.32 3.20 377

Second stage(all rounds)

3.40 0.00 3.32 0.42 449 0.00

2b. COM First stage (allrounds)

4.39 3.19 370

Second stage(all rounds)

3.53 0.00 4.34 0.00 471 0.00

3a. REGlast 3rounds

First stage(last 3 rounds)

4.13 3.53 403

Second stage(last 3 rounds)

4.13 0.96 1.66 0.00 366 0.07

3b. COMlast 3rounds

First stage(last 3 rounds)

4.40 3.19 369


3.54 0.00 4.37 0.00 470 0.00

4a. Sus-tainabilityREG

Second stage(®rst 3 rounds)

2.60 4.96 537


4.13 0.00 1.66 0.00 366 0.00

4b. Sus-tainabilityCOM

Second stage(®rst 3 rounds)

3.70 4.07 455


3.54 0.40 4.37 0.26 470 0.88

a The p-values are from the Wilcoxon rank sum test.

Figure 3. Average individual decisions.


balance between self-interested and other-regarding behavior. For this we need to analyzethe average deviation of the decisions of theparticipants from their individual Nash strate-gies in each round. 6 These comparisons are inFigure 4 and column 4 of Table 1.

The left-hand side of Figure 4 shows that bothsets of groups, those that would later be sub-jected to a rule and those that would later beallowed to communicate, made choices in the®rst stage that were more than three units loweron average than their Nash best-responses.Thus, without the ability to communicate andwithout outside intervention, the participantsmade choices that were, on average, signi®-cantly more group-oriented than their Nashstrategies. As expected, there was no statisticaldi�erence between the communication andregulation groups, who averaged 3.19 and 3.20,respectively (Table 1, row 1, column 4).

When the regulation was introduced, severaloutcomes are of note. First, the average de-viation from best-responses in the secondstage remained statistically unchanged fromthe ®rst stage rounds (Table 1, row 2a, col-umn 4). But in comparing the last threerounds of the ®rst stage with the last threerounds of the second stage, allowing partici-pants to adjust to the experiment in the ®rststage and to the regulation in the second, weobserve a sizable and statistical change inaverage deviations from Nash responses. Inthe ®rst stage the average for the ®nal threerounds was 3.53, while during the ®nal threerounds of the second stage, participants were,on average, within 1.66 of their Nash re-

sponses (Table 1, row 3a, column 4). Clearly,as participants gained experience with the timequota, the imperfect monitoring, and the ®-nancial sanctions, they moved rather rapidlytoward their self-interested responses; the av-erage deviation from Nash responses in the®rst three rounds of the second stage of 4.96plummeted to 1.66 by the ®nal three rounds(Table 1, row 4a, column 4).

One of the groups facing the regulation be-haved very di�erently from the others. Itsmembers actually made choices that weremuch further from their best responses thanthey did prior to the imposition of the timequota. The average deviation from their best-responses rose from 4.83 in the ®nal threerounds of the ®rst stage to 6.75 in the ®nalthree rounds under the regulation. Excludingthis unusual group, the average deviation ofthe other groups facing the regulation was 0.39in the ®nal rounds of the second stage. Thisvalue is not statistically di�erent from zero,implying that these subjects were, on average,essentially playing their Nash best-responsesafter they gained some experience under theregulation.

If one accepts the notion that the di�erencebetween the Nash response and the actualchoice of an individual is an indication of howthe person balances own interests against thoseof the rest of the group, the message is clear.After the subjects that faced the external regu-lation quickly adjusted to the relatively modestconsequences of noncompliance, they madechoices that were signi®cantly closer to theirpurely self-interested Nash responses. Thus, it

Figure 4. Average deviations from individual Nash best-responses.


appears that the presence of an external controlcrowded out other-regarding behavior in favorof greater self-interest.

The participants that were allowed to com-municate, in contrast, moved further from theirNash best-responses, making more e�cientchoices on average; their mean deviations rosefrom 3.19 before communication was allowedto 4.34 afterward (Table 1, row 2b, column 4).Comparing, as with the regulation groups,mean deviations for the ®nal three rounds ofthe ®rst and second stages, we ®nd a similarmove toward greater group-regarding deci-sions. The average deviation from best re-sponses for the ®nal three periods beforecommunication was allowed was 3.19, com-pared with 4.37 for the ®nal three rounds aftercommunication was allowed (Table 1, row 3b,column 4). Finally, unlike the groups facing theoutside regulation, once communication wasallowed, the average deviation from the Nashresponses was relatively stable: the mean devi-ation in the ®rst three rounds of communica-tion was 4.07, and for the ®nal three rounds,4.37 (Table 1, row 4b, column 4).

The di�erence between the e�ects of com-munication and regulation on the balance be-tween self and other-regarding behavior couldnot be more stark. While external regulationquickly crowded out group-oriented behaviorin favor of greater self-interest, the simpleability to communicate induced a shift fromchoices that were relatively group-oriented inthe absence of communication to an evenstronger group-orientation with communica-tion.

And it should come as no surprise that thesee�ects are re¯ected in the subjectsÕ earnings.Figure 5 and column 5 of Table 1 analyzechanges in average earnings. 7 Consistent withthe average e�ort levels and the average devi-ations from individual Nash responses, the perround earnings of participants of the two setsof groups in the ®rst stage were statisticallyidentical, $370 and $377 (Table 1, row 1, col-umn 5).

The average per round earnings of thosethat faced the regulation in the second stagerose statistically, from $377 to $449 (Table 1,row 2a, column 5). Clearly much of this in-crease is due to behavior in the ®rst severalsecond-stage rounds in which a high propor-tion of the participants complied with theregulation. But, of course, these initial gainsquickly dissipated; comparing the last threerounds of the ®rst and second stages, we havea statistical loss in average earnings from $403per round in the ®rst stage to $366 per roundin the second (Table 1, row 3a, column 5).Even more dramatically, average earnings fellfrom $537 in the ®rst three rounds of thesecond stage to $366 in the ®nal three rounds(Table 1, row 4a, column 5).

Recall that one of the regulation groupsmade choices that were signi®cantly moregroup-oriented during the second stage thanthe others. Looking at the earnings of thisgroup apart from the rest provides a dramaticillustration of the welfare consequences of thecrowding out e�ect of regulation. Averageearnings over the last three rounds of the sec-ond stage for this group were $641 per round.

Figure 5. Average individual earnings.


The other regulation groups, who essentiallyplayed Nash strategies over those same rounds,earned $296. These same subjects earnedan average of $373 per round over the lastthree rounds before the regulation was intro-duced.

In contrast, the communication groupsearned consistently more when allowed tocommunicate. Considering all rounds, averageearnings rose from $370 in the ®rst stage to$471 in the second (Table 1, row 2b, column 5).Nearly the same gains are observed when con-sidering only the last three rounds of the ®rstand second stages (Table 1, row 3b, column 5).The gains a�orded the participants that wereallowed to communicate were stable in thesecond stage; there was no statistical di�erencein earnings at the beginning of the communi-cations rounds and the ®nal communicationsrounds (Table 1, row 4b, column 5). Finally, itis worth noting that at the end of the secondstage, the communication groups were earningabout 26% more, on average, than the regula-tion groups combined.

4. CONCLUDING REMARKS:IMPLICATIONS FOR POLICY AND

FUTURE RESEARCH

We have presented evidence that indicatesthat local environmental policies that aremodestly enforced, but nevertheless are pre-dicted by standard theory to be welfare-improving, may be ine�ective. In fact, such apolicy can do more harm than good, especiallyin comparison to allowing individuals collec-tively to confront local environmental dilem-mas without intervention. We have alsoargued, and presented evidence, that the fun-damental reason for the poor performance ofexternal control is that it crowded out group-regarding behavior in favor of greater self-interest.

If true in a wide range of environmental andother social contexts, the implications of ourresults are rather substantial. Economic theo-ry will be a poor guide for designing envi-ronmental policies if it does not allow forother-regarding motivations, or if it fails torecognize that these motivations are not ®xedwith respect to institutional arrangements.Recognizing institutional endogeneity of thebalance between self-interested and group-regarding behavior when it occurs will have

profound implications for nearly every aspectof environmental policy design and evaluation,including:

Ðcost/bene®t analyses to identify e�cientenvironmental goals;Ðthe choice of environmental problems thatcan be addressed e�ciently by governmentregulation;Ðthe federalism question of which level ofgovernment (local, state, or federal) shouldconfront a particular environmental prob-lem;Ðthe choice of control instrument (quotas,taxes, transferable property rights); andÐthe design of enforcement strategies.

A complete accounting of the possible rami®-cations of the crowding-out hypothesis for en-vironmental policy is well beyond the scope ofthis paper, but let us discuss a few.

Our results have implications for the perfor-mance of well-intentioned but only modestlyenforced environmental polices, which cur-rently exist in rather great numbers. One maybe tempted to believe that inadequate enforce-ment of these policies, at worst, renders themine�ective, or that they only fall short of theirintended goals. Our results suggest a morepessimistic possibility: policies intended toreach more desirable social states, but that areweakly enforced, may actually do more harmthan good because their existence triggers thecrowding-out of socially desirable behavior.

The remedy is not necessarily more vigorousenforcement. More stringent enforcement gen-erally is more costly. Furthermore, the crowd-ing-out phenomenon may very well imply thatthe potential welfare gains from regulation areless than standard theory would predict. Thus,in some cases, the welfare gains may not justifythe costs of achieving acceptable levels ofcompliance.

Others have suggested that crowding-out ofother-regarding behavior triggered by a par-ticular regulation may spill over into othersocial dilemmas that a community faces (Weck-Hannemann & Frey, 1995). For example, thecrowding-out of public spiritedness as a con-sequence of the government restriction on col-lecting ®rewood from a nearby forest may, inactual settings, make it more di�cult for acommunity to deal with other environmentalissues like the disposal of household waste.Thus, the e�ects and costs of crowding-outtriggered by a particular regulation may extendwell beyond the problem the regulation is in-tended to address.


On a more optimistic note, our results sug-gest that more research should be aimed atlearning how institutions may be designedwhich promote cooperation and avoid crowd-ing-out group-regarding motives and behavior.For example, government regulations are oc-casionally developed in concert with the e�ortsof local grass roots organizations. Activecommunication and e�ort at the local levelmight eliminate or reduce the tendency ofgovernment regulations to induce more self-interested behavior, perhaps because localparticipation reminds community membersthat they have the power to in¯uence the well-being of their community and that ``cheating''is more than simply a game against the gov-ernment. If the a�liation of a regulation withlocal groups helps to avoid a crowding-out ofcooperative spirit, then our results suggest thatsuch a rule will be more successful than theregulation alone.

Relatedly, an implication is that the framingof a regulation may be even more importantthan currently appreciated. It now seems clearthat institutions frame choices, and the waythey are framed can have important e�ects onchoice behavior (Bowles, 1998, p. 87). Themanner in which a regulation is marketed maywell make a di�erence in the degree of other-regarding behaviors exhibited by participantsin a game as well as by members of society inthe real world. Additional care in framing rulesin ways more friendly to the objective of stim-ulating more socially e�cient choices mayproduce substantial payo�s if doing so elimi-nates the tendency of external rules to crowdout other-regarding behavior.

These policy implications, as well as othersnot mentioned, also suggest potentially fruitfuldirections for additional research. For example,additional experiments should hold constantthe type of rule, but vary the way it is framed to

learn more about the e�ect of framing per se oncrowding out. Further, to investigate whetherlocal community e�orts may or may not ame-liorate crowding out associated with externally-imposed regulations, additional experimentsshould be undertaken in which one set ofgroups is subject to a rule and not allowed tocommunicate, while another set is subjected tothe same rule, but where participants are al-lowed to communicate with each other.

It would be useful, as well, to conduct anumber of experiments in the reverse order.Since external regulations are rather common-place in many environmental dilemma settings,it would be useful to know whether the be-havioral responses to an institutional changeare symmetric. If more self-interested behaviorfollows a change to government regulation,would a move away from external regulationinduce more other-regarding behavior? Sun-stein's (1993) observation that preferences for agood or a right depend on whether it was ini-tially an entitlement conferred by an externalbody suggests that the behavioral responses toan institutional change might not be symmet-ric; that is, behavioral responses may dependon the order in which institutional changeoccurs.

Previous research, and the research reportedhere, suggests that typically individuals in alocal environmental dilemma do not make ef-®cient choices; neither do they act in a purelyself-regarding way. Regulations developed inthe hopes of resolving environmental and socialdilemmas typically aim at nudging individualstoward more socially e�cient actions. Our re-sults, and the related work of others, suggestthat these good intentions can be thwarted ifexternal rules trigger a loss of public spirited-ness. Policies that do not take account of thisphenomenon may very well do more harm thangood.

NOTES

1. Although Titmus did not o�er convincing evidence

of this conjecture, Upton (1973) made a more compel-

ling case. Among a group of previous donors in Denver

and Kansas City, some were o�ered payments to give

again while others were not. The rate of donating was

substantially higher among those not o�ered the mon-

etary reward.

2. In this sense, preferences may in some settings be

endogenous, notwithstanding the generations of econo-

mists who have assumed preference exogeneity. Arguing

the plausibility of endogenous preferences, Bowles

(1998, p. 75) asserts, ``Markets and other economic

institutions do more than allocate goods and services;

they also in¯uence the evolution of values, tastes, and

personalities.'' Similarly, in the arena of the environ-

ment, Sunstein (1993, pp. 223±224) argues that it may

not be possible for government to assume preferences to

be exogenous, because, `` . . . whether people have a

preference for a good, a right, or anything else is often in


part a function of whether the government, or law, has

allocated it to them in the ®rst instance.''

3. Since the playerÕs payo�s are identical, optimality

requires symmetric individual choices. Let x denote the

common amount of time each individual spends collect-

ing ®rewood in any symmetric outcome. Using [1], the

joint welfare function is W �x� � n�lg=d��a�q0ÿ b�nx�2=2�� cxÿ /�x�2=2� � w� �eÿ x��g. The ®rst-order condi-

tion for the maximization of W(x) requires ÿabxn2 �cÿ /xÿ w � 0. Solving for x and substituting the actu-

al parameter values yields optimal individual amounts

of time spent harvesting ®rewood, x� � �cÿ w�=�/� abn2� � 1.

4. Even in industrialized countries, enforcement strat-

egies for environmental and natural resource regulations

appear to be rather weak in the sense that expected

marginal penalties do not appear to be su�cient to

ensure acceptable levels of compliance (Cohen, 1998).

This also appears to be true of other forms of regulation;

for example, income tax compliance in the United States

(Andreoni, Erard, & Feinstein, 1998).

5. Clearly, we could not control the risk-attitudes of

the subjects. Predominant risk-aversion would imply

lower Nash equilibrium individual choices, while risk-

loving would have the opposite e�ect.

6. For each individual and each round, the highlighted

cells in Figures 1 and 2 give individual Nash best-

responses. The choices of the rest of the group in a

particular round were taken to be their actual choices.

We calculated the di�erence between each individualÕsbest response and their actual choice and averaged these

di�erences for each round for the communication and

the regulation groups.

7. Earnings data for those groups that faced the

external regulation are net of the penalties that were

assessed.

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