Research Quick Take: Strategy Adjustments in Games with a Dynamic Public Bad: Experimental Evidence

Economists see environmental contamination and climate change as a social dilemma among polluting industries. A company in a polluting industry has to make a decision. They can profit more in the short term by engaging in more industrial production, but they generate a potentially costly “social bad” that all actors have to deal with in the long term, in the form of emissions. Do decision makers in these situations simply respond to the state they are in – the amount of profit to be made and the costliness of the environmental impact – or do their competitors’ choices also influence their decision? Economists are interested in how people behave in such a situation, which they consider a dynamic game since the effects of environmental degradation influence many decisions over a long period.

To examine how people behave in a dynamic game, Pevnitskaya and Ryvkin observed FSU students play an actual game. The rules, invented by the researchers, model the situation of investors in a polluting industry. Each round, two participants get tokens to invest in “production.” Choosing to produce more earns more profit but also generates “emissions” at a rate that affects both players equally. Both profit and emissions carry over to future rounds, with the total level emissions decreasing the rate of return on the players’ investments in production. The researchers compared a group of players who were told that choices in the game involve pollution and environmental damage and another group who were not.

Pevnitskaya and Ryvkin find that in general, players start out ignoring what their opponents are doing, but as the rounds go on, react more to each other’s prior choices. In the group who were not told about the environmental meaning of the game, players have a higher tendency to over-produce at first. Consequently, they develop a greater degree of reciprocity in later rounds. When players play the game a second time, they show reciprocity right from the beginning. Pevnitskaya and Ryvkin conclude that the effects of the choices of others increase with experience.

These findings have hopeful implications for environmental remediation and climate policy. Industrial enterprises that have made harmful choices around pollution in the past may be willing to limit their production in the interest of polluting less. This change of strategy is only possible with collaboration across the industry.

Dr. Svetlana Pevnitskaya is an Associate Professor of Economics at FSU.

Dr. Dmitry Ryvkin is a Bernard F. Sliger Professor of Economics at FSU.

This post is a summary of Pevnitskaya and Ryvkin‘s recent piece, summarized by COSSPP blog researcher, Jesse Fried.

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