Reverse Contests as a Means to Reduce Polluting Activity

Contests are situations in which contestants invest efforts, time or money to win a valuable prize (e.g., political or advertising campaigns, R&D races) forfeiting their bids irrespective of the outcome of the contest. Game-theoretic analyses stipulate that, in equilibrium, total investment would dissipate - equal the value of the prize. However, experimental studies of contests revealed considerable over-dissipation, with investments exceeding the value of the prize. In light of these findings, and findings that punishments are more effective than rewards in bringing about socially desirable behavior, we propose a reverse contest, in which contestants compete to avoid a penalty imposed on the highest polluter, to curb polluting production. "Investments"are thus the profits given up by reducing profitable (but polluting) production. In four experiments (total N=288), groups of randomly re-matched agents repeatedly (for 40 rounds) decided how much of their available funds to invest in profitable production, knowing that the one who invested the most would be fined. Players were characterized by their funds and productivity rate. In every group there was at least one agent who would profit if investing all funds and being penalized. We tested (a) If agents invest, in production, less than their full funds. (b) Whether the profits given up by reduced production exceed the penalty. (c) How any effects observed change with time. We manipulated group size, penalty size, group composition (homogeneous or heterogeneous), and whether the participants knew that production was polluting. Across the four experiments, we observed that: (a) Investments in production were much lower than the maximum possible (64% of the maximum). (b) The profits given up by reduced investments were higher than the penalty (by 57%). (c) Investments went up and the profits given up went down over the first few rounds, but then stabilized. All in all, our data indicate that reverse context may prove a valuable tool at the hands of policy makers wishing to curb polluting activity.