The interview was conducted by Solenn Le Goff
Behavioral Economics studies real behavior in the real world. However, most of your research happens in the laboratory. What are the advantages and drawbacks of laboratory experiments when studying consumption or social behavior?
The key advantage of laboratory experiments is that as a researcher, you can set the parameters. Experiments create an artificial world in which all influencing factors are precisely determined. On the other hand, one can never be completely sure whether an experiment conducted in the laboratory would actually lead to the same results if it were conducted in real life. However, there is evidence pointing to the external validity of laboratory results. For example, there is an exciting study by my colleague Ernst Fehr that looked at the behavior of fishermen in Brazil in the lab and in real life. He found that fishermen who were more cooperative in the lab game were also had fishingnets with a larger mesh width. Nets with narrow mesh will catch small fish that are not yet fully grown and should not be caught. So they found a correlation in cooperative behavior between the real and the artificial situation.
Let's take a concrete example: I can choose between a cheaper good with negative social or environmental impact and a more expensive one that was produced under better conditions. I choose the second one. What are the underlaying mechanisms of my decision?
In a whole series of studies that my colleague Roberto Weber and I conducted, we investigated whether there is such a thing as socially responsible behavior in market situations. We explored the general assumption that values such as fairness or altruism do not play a key role in markets. To investigate whether this assumption holds true, we placed subjects into market situations where real money could be earned and spent. We saw that some people did not behave in a purely self-interested manner but were actually willing to pay a higher price for a fair product without negative externalities. In our experiments with subjects in Switzerland, the market share of this fair product was about 50%. This result shows that many people are willing to behave in a fair and socially responsible way in market situations.
What factors play a role in the decision to purchase a fair but more expensive product?
First of all, the classic economic argument – the relative price – influences the decision. This is no surprise: If behaving in a fair and socially responsible manner becomes more expensive, fewer people will do so. Cultural background is a second key factor. To investigate this, we compared Chinese and Swiss consumer behavior. The exact same study led to very different results in the two countries. The market share of the fair product, which was around 50% in Switzerland, was only between 15 and 20% in China.
Why did you choose China for the country comparison?
Our hypothesis was that because China is still a relatively young market economy system, the profit motive is more pronounced there. Also, environmental considerations have less weight. People may therefore be more willing accept negative externalities for a cheaper price. These were our assumptions. Our results show that certain behavioral norms in China do indeed differ from those in Switzerland. Social norms regarding acceptable or ethical behavior in markets therefore do not seem to be universal.
Do income and standard of living play a role in socially responsible behavior?
There is this hypothesis that the richer societies become, the greater the willingness to pay more for a product in order to prevent negative externalities. But it is difficult to confirm this hypothesis. When comparing the behavior of richer and less rich individuals or countries in field data, you cannot infer causality. We don’t know if a person behaves more or less socially responsible because they are rich, or if they are rich because they behave in a socially responsible manner. Laboratory experiments have a clear advantage compared to field studies: in the laboratory, you can control and set factors such as income. We looked at whether the people who made a surprising amount of money in our experiments were willing to behave more socially responsible, and indeed they were. This means that there is a causal effect of higher income on higher willingness to pay for socially responsible, fair products. This is an encouraging result. One might expect responsible market behavior to increase when wealth increases, as is the case in China.
We observe an increasing awareness for the pressing challenges we are facing such as climate change, both at the political level and within society. As a behavioral economist, do you have an explanation for this?
We do indeed see an increased awareness of climate change at both levels. But which event is pulling the other? Is public awareness increasing because the issue is becoming more central to policy debates, or is there more discussion at the policy level because public opinion is becoming more vocal? It’s difficult to establish causality, because both are happening at the same time.
To what extent can behavioral economics mitigate climate change and increase socially responsible behavior?
Climate change essentially goes back to the fact that external costs arise when certain goods are traded. A classic approach to addressing these issues is taxes for negative externalities, or subsidies for positive externalities. As behavioral economists we are interested in understanding whether voluntary socially responsible behavior could reduce the externalities problem. This behavior is not influenced by external regulatory factors but comes intrinsically. We conducted laboratory studies to examine if public debate can increase the market share of a fair product. In the experiment, some of the subjects could choose to discuss their views on a voluntary basis in the run-up to the study. For example, they discussed whether it would be okay to trade a product with a known negative impact or the appropriate price for a fair product. By discussinbg these issues with their peers the participants got a clearer sense of how others felt about them. This created a shared understanding and consensus. We found a powerful effect: The discussion before the market experiment significantly increased the market share of fair products.
Did these discussions have the same effect in the Swiss and the Chinese setting?
Although we saw less market share for fair products in our standard setting of experimental markets in China, our data showed that the prior discussion also significantly increased the market share of fair products in China, leading up to nearly 50%, which is the market share of the fair product in Switzerland when participants did not have the opportunity to discuss in advance. In both countries the discussion about harmful side effects of products changed the behavior of market participants towards greener, fairer and more responsibly produced goods.
So, public discourse is a universal tool to raise awareness about responsible behavior?
Precisely, discussions and campaigns focusing on appropriate market behavior can be tools to shape responsible norms for behavior in markets and reduce inefficiencies due to market failures.