Experimental Simulations of a Subsidy System to Reduce Production of Environmentally Harmful Products

Abstract: The environment on earth is threatened by increasing trends in consumption and production causing the highest emission levels ever. Therefore, finding solutions targeting these trends are needed. Previous psychological research has put much emphasis on cooperative solutions to solve resource dilemmas in interdependent decision making, such as the effects of communication. In competitive markets this is however not a possible solution since price cooperation is prohibited by law. The aim of the present thesis is to investigate the effects of an environmental policy with the focus on producers? decision making. A subsidy system reimbursing a reduction in sales (production) is experimentally investigated by simulating a market. In Study I, a high and a low level of a subsidy was compared to no subsidy. It was shown that the subsidy led to higher prices and reduced sales, and also inhibited the start of price wars. The results were dependent on the level of the subsidy suggesting that participants used the subsidy and the opponent?s previous price as reference values to guide their behavior. In Study II two experiments were performed to investigate the effects of uncertain and varying levels of the subsidy. The results replicated Study I in showing significant effects of the subsidy but no effects of uncertainty. Decisions were found to be competitive in that the participants changed their decisions in response to their opponent?s decisions. The results supported the hypothesis that reference values guide behavior. By introducing two conditions with cooperation, Study III investigated if the subsidy affected competition on the market. The results showed that participants in competitive conditions did not behave collusive or cooperatively. At the same time the effects of the subsidy did once again replicate previous findings, showing increased prices and reduced sales. Participants? behaviors were found to be guided by their opponent?s decision and the level of the subsidy. It is concluded that the decisions are guided by reference values constituting the boundaries of a price setting zone, which determines the price decisions. However, since the results in the three studies also showed that price wars were inhibited, an issue is whether additional mechanisms of increased risk taking and/or less loss aversion may have influenced the participants? behavior.