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Choice overload, coordination and inequality: three hurdles to the effectiveness of the compensation mechanism?

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  • Estelle Midler
  • Charles Figuières
  • Marc Willinger

Abstract

In this paper we test the effectiveness of a compensation mechanism when a negative externality is produced. It allows agents suffering from the negative externality to compensate those who reduce its production. Transfers are implemented via a two-stage design which is an adaptation of Varian’s mechanism. It has been previously tested in the lab with different types of games, and its effectiveness turns out to depend on the experiment, for unclear reasons which we try to decipher in this paper. Three possible explanations, choice overload, mere coordination and inequality, are proposed and studied. We show that, other things equal, the larger the size of the strategy space, the lower the mechanism’s efficiency (choice overload effect). Perhaps surprisingly, the data show that the appearance of additional equilibria does not jeopardize effectiveness (no mere coordination effect). Finally, inequality of outcomes plays a key role (fairness effect).

Suggested Citation

  • Estelle Midler & Charles Figuières & Marc Willinger, 2013. "Choice overload, coordination and inequality: three hurdles to the effectiveness of the compensation mechanism?," Working Papers 13-01, LAMETA, Universtiy of Montpellier, revised Feb 2013.
    • Handle: RePEc:lam:wpaper:13-01
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    References listed on IDEAS

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    Cited by:

    1. Tatsuyoshi Saijo & Takehito Masuda & Takafumi Yamakawa, 2018. "Approval mechanism to solve prisoner’s dilemma: comparison with Varian’s compensation mechanism," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 51(1), pages 65-77, June.
    2. Figuières, Charles & Long, Ngo Van & Tidball, Mabel, 2017. "The MBR intertemporal choice criterion and Rawls’ just savings principle," Mathematical Social Sciences, Elsevier, vol. 85(C), pages 11-22.
    3. Hassan Benchekroun & Charles Figuières & Mabel Tidball, 2016. "Implementation of the Lindahl Correspondance via Simple Indirect Mechanisms," AMSE Working Papers 1637, Aix-Marseille School of Economics, France.
    4. Tatsuyoshi Saijo & Takehito Masuda & Takafumi Yamakawa, "undated". "Approval Mechanism to Solve Prisoner’s Dilemma: Comparison with Varian’s Compensation Mechanism," Working Papers SDES-2016-15, Kochi University of Technology, School of Economics and Management.
    5. Jan Libich & Dat Thanh Nguyen, 2022. "When a compromise gets compromised by another compromise," Australian Economic Papers, Wiley Blackwell, vol. 61(4), pages 678-716, December.

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