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Market Failure or Success

The New Debate

Edited by Tyler Cowen and Eric Crampton

Recent years have seen the development of new theories of market failure based on asymmetric information and network effects. According to the new paradigm, we can expect substantial failure in the markets for labor, credit, insurance, software, new technologies and even used cars, to give but a few examples. This volume brings together the key papers on the subject, including classic papers by Joseph Stiglitz, George Akerlof and Paul David. The book provides powerful theoretical and empirical rebuttals challenging the assumptions of these new models and questioning the usual policy conclusions. It goes on to demonstrate how an examination of real markets and careful experimental studies are unable to verify the new theories. New frontiers for research are also suggested.
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Chapter 17: Cooperation in public-goods experiments: kindness or confusion?

James Andreoni


17. Cooperation in public-goods experiments: kindness or confusion? James Andreoni1 Theories of free-riding predict that privately provided public goods should have very few contributors, and contributions should be very small. Nonetheless, millions of people give to public goods like the Red Cross and Public Broadcasting, and they generally contribute sizable sums.2 This observation has caused researchers to re-examine models of giving, and it has become important to understand the role of social and cultural factors like altruism and Ôwarm-glow.Õ These issues extend beyond charitable giving, into public goods within the family and intergenerational altruism (see e.g., B. Douglas Bernheim et al., 1985; Bernheim, 1986; Andreoni, 1989; Joseph Altonji et al., 1992). As with real-world giving to public goods, experiments on free-riding find that subjects are generally more cooperative than predicted, and often much more cooperative. This suggests that the same social and cultural influences thought to affect real-world giving could be at work in experiments. However, the goal of laboratory experiments is to control the incentives of subjects and to remove the social and cultural influences to the greatest extent possible. If the theory being tested is correct, then the cooperation observed should be due to subjects who misunderstand the instructions or the incentives in the experiment. Hence, the cooperation should be caused only by errors and confusion, and not altruism, warm-glow, or other forms of kindness. If confusion is the principal explanation for cooperation, then this justifies the emphasis on ÔlearningÕ in the experimental literature. Unfortunately, it is impossible...

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