Prosocial Signalling - How Do Pricing Strategy, Incentives and People’s Motivation interact in the Area of Environmental Policy and Economics?
Goytom Abraha Kahsay
In contrast to the standard economic theory predictions, it seems clear that people do spend their time and resource to benefit others. Many lab and field experiment studies show that people display prosocial preferences such as altruism, reciprocity and conditional cooperation, fairness, etc. Policy makers and charity organizations have tried to exploit this prosocial behaviour to foster supply of public goods and donations respectively. However, there is vast literature showing that incentives that aim to foster prosocial behaviour sometimes have reverse reactions, crowding out pre-existing prosocial behaviour. The use of prosocial behaviour to boost supply of public goods is not limited to charities and volunteering. It is being used in everyday consumer goods such as green products and fair trade labels. It is also being used by firms in hope of increasing their profitability and keeping sustainable business, for instance introducing Pay-What-You-Want (PWYW) pricing schemes and attaching charity component to their products.
Consumers of everyday market products are willing to pay for prosocial characteristics such as fair trade, animal welfare and environmental friendliness. It has been suggested that consumers pay price premium because this sends the signal that the consumer has prosocial preferences and a few empirical studies have documented that reputation plays a key role when consumers choose products containing prosocial components. However, little is known about consumers’ behaviour in these circumstances and how incentives might interact with prosocial behaviour in everyday consumer goods.
The aim of this thesis is to address these issues from theoretical and empirical perspectives. It proposes theoretical models to explain consumers’ prosocial behaviour in every day consumer goods and presents empirical evidences from a natural consumption data. This thesis also investigates consumers’ behaviour under a newly introduced pricing system called Pay-What-You-Want (PWYW) and investigates empirically whether reputation signalling can be used as a policy instrument in other economic and environmental domains.
This thesis consists of five papers which can be divided into three parts. The first part consists of three papers which all investigate consumers’ behavior when prosocial signalling is important. The second part of the thesis consists of one paper which focuses on the role of social network in facilitating factor input transactions and the role of reputation in reducing enforcement. Finally, the third part consists of one paper which is concerned with investigating the effect of climate change and adaptation policy on agricultural production in Eastern Africa.
The first part of the thesis proposes a reputation-signalling model of demand for consumer goods containing prosocial characteristics such as a ‘fair trade’, ‘organic’ certification, products with charity component, or products offered under PWYW. The first paper of this part shows that reputation signalling can cause reverse price reactions resembling the crowding-out of pre-existing motives for prosocial behavior seen in situations of volunteering and charitable giving. Using a unique combination of questionnaire and purchase panel data, it presents evidence of such reputation-driven reverse price reactions in the Danish market for organic milk. The second paper proposes a self-image model to account consumers’ behaviour under PWYW. It finds that when a good’s fixed price is lower than an exogenously given threshold fair value, PWYW can lead to a lower utility, which may lead to lower purchase rate and higher average price, accounting for previously unexplained lab and field experimental evidence. An increase in the threshold fair value decreases the buyer’s utility and may further lower the purchase rate, resulting in a further increase in purchase price. Finally, by introducing uncertainty in the threshold fair value, the third paper proposes a self-signalling model and finds that PWYW market outcomes are not stable. It also finds that providing reference price doesn’t always improve PWYW prices consistent with previous lab and field experiment results.
The second part of the thesis presents empirical evidence on the role of indigenous social networks, namely iddir associations, in facilitating factor-input transactions among smallholder farmers. Iddir networks provide information advantages, trust, and reputation based contract enforcement. It finds that iddir membership improves household’s access to labor sharing, sharecropping, and credit sources. Furthermore, the findings also indicate that iddir networks crowd-out expensive and inefficient informal credit sources without virtually affecting formal credit sources. Finally, the third part of thesis presents new evidences regarding the effects of climate change on agriculture in Eastern Africa. By disaggregating climate variables in to growing and non-growing seasons, the paper finds a negative effect of within growing season variance of precipitation on agricultural output in East Africa. It also finds a substantial potential for mitigating the effects of within growing season precipitation variability through conventional technologies such as flexible planting and rainwater harvesting that substantially exceeds the potential loss from predicted climate change.
Lars Gårn Hansen, Professor, Department of Food and Resource Economics, University of Copenhagen
Leif Jonas Nordstrom, Associate professor, Department of Food and Resource Economics, University of Copenhagen
Professor Erwin Bulte, Professor, Wageningen University, Netherlands
Professor Adriaan Soetevent, Professor, University of Groningen, Netherlands