Loss Aversion In Voluntary Provision Of Public Goods:Why Cannot We Achieve The Best Level?

In voluntary provision of public goods, the previous studies mainly focus on the deviation of experimental evidence and our real life from the classical economic prediction which implies a zero contribution rate as the dominated strategy. Some other studies are trying to find some way and mechanisms to improve the cooperation level in public good experiment. However, the experimental evidence and our reality in voluntary provision of public good also deviate from the best cooperation level, but there is no research focused on this gap by now.This paper tries to fill up the gap between the ideal outcome in voluntary provision of public good and experimental evidence. We try to give an answer to the question that why we cannot achieve the best cooperation level and we suggest it is because of loss aversion. Our core hypothesis is that loss aversion plays an important role in public good provision and it lowers the cooperation level. In the paper, we use an experimental approach to test my hypotheses, in which two types of framing are presented into three different treatments:gain treatment, covered loss treatment, and real loss treatment. While, according to previous studies, loss aversion may have some relationship with risk aversion, so we induced a binary lottery to measure the risk profile of each group in order to control the loss aversion profile of each group which would affect our experiment in certain ways.The experiments were conducted in Shandong University, China. Data from78subjects, in which41are female and37are male, shows that subjects in the loss treatments make significantly less contribution into the public good than subjects in the gain treatment, and this result is even significant when we controlled the degree of loss aversion in each treatment. This means that loss aversion is one significant thing which makes subjects depart from the best contribution level for themselves as a whole. We further discussed the relationship between loss aversion and altruism, trust, and punishment, and we suggest that loss aversion is the cardinal factor that influences the cooperation level in voluntary provision of public good, and others can enhance subjects cooperation just because they can lower the degree the subject’s loss aversion. In voluntary provision of public goods, the previous studies mainly focus on the deviation of experimental evidence and our real life from the classical economic prediction which implies a zero contribution rate as the dominated strategy. Some other studies are trying to find some way and mechanisms to improve the cooperation level in public good experiment. However, the experimental evidence and our reality in voluntary provision of public good also deviate from the best cooperation level, but there is no research focused on this gap by now.This paper tries to fill up the gap between the ideal outcome in voluntary provision of public good and experimental evidence. We try to give an answer to the question that why we cannot achieve the best cooperation level and we suggest it is because of loss aversion. Our core hypothesis is that loss aversion plays an important role in public good provision and it lowers the cooperation level. In the paper, we use an experimental approach to test my hypotheses, in which two types of framing-a gain frame and a loss frame-are presented into three different treatments:gain treatment, covered loss treatment, and real loss treatment. While, according to previous studies, loss aversion may have some relationship with risk aversion, so we induced a binary lottery to measure the risk profile of each group in order to control the loss aversion profile of each group which would affect our experiment in certain ways.The experiments were conducted in Shandong University, China. Data from78subjects, in which41are male and37are female, shows that subjects in the loss treatments make significantly less contribution into the public good than subjects in the gain treatment, and this result is even significant when we controlled the degree of loss aversion in each treatment. This perfectly confirms the predictions of our theoretical hypothesis. We further discussed the relationship between loss aversion and altruism, trust, and punishment, and we suggest that loss aversion is the cardinal factor that influences the cooperation level in voluntary provision of public good, and others can enhance subjects cooperation just because they can lower the degree the subject’s loss aversion.