Douglas A. Norton

The pay-what-you-want business model: Warm glow revenues and endogenous price discrimination

We explore the potential benefits of an up-and-coming business model called “pay-what-you-want” in an environment where consumers experience a warm glow by patronizing a particular firm. We show that, given a social norm regarding minimum contributions, a pay-what-you-want firm should announce a minimum suggested contribution, which is positive—but smaller than the profit-maximizing single price—so as to benefit from “endogenous price discrimination,” whereby consumers differentially contribute more than the suggested minimum. Furthermore, a pay-what-you-want scheme can improve market efficiency and, in special cases, generate more profit than a standard posted price scheme. These results are robust to alternate motivations for generosity, including gift-exchange.

Endogenous production technology in a public goods enterprise

Purpose – Motivated by new models of nonprofit organizations, we study a voluntary contributions environment in which the productivity of the public goods process is chosen endogenously by a manager. The experimental treatments incorporate two institutions of transparency in the organization, which we conjecture will assist the manager in achieving an outcome superior to the standard free-riding prediction. Methodology – The chapter uses the methodology of laboratory experimental economics. Findings – The findings demonstrate that transparency institutions can be important for assisting the manager and the stakeholders achieve relative stable and efficient outcomes. Limitations – We discuss obvious areas for further investigation including environments in which firm productivity is only stochastically related to the decisions of the manager. Practical and Social Implications – The chapter is oriented to real-world issues in the organization of nonprofit enterprises, which were a once ubiquitous and now re-emerging source of charitable activity. The chapter is written so that it should be accessible to informed practitioners in nonprofit organizations. Originality – The study of endogenous environments and institutions in the provision of charitable and public goods is a relatively new advance and is indeed the theme of Research in Experimental Economics, Volume 13, “Charity with Choice.”

Corruption Reform, Equilibrium Selection, and the Institutional Entrepreneur

This work is intended to be what has been called an “analytical narrative;” that is, it is a presentation of a specific, naturally occurring circumstance but with the analysis examined through the lens of a strategic economic model. The core of our model, corruption reform modeled as an equilibrium selection problem, is presented in the first two sections. We then describe in greater detail many of the policies William Parker implemented in his reform drive in the Los Angeles Police Department. We close the chapter by relating his policies back to our model.

Experiments in financial economics

Research in Experimental Economics focuses on laboratory experimental economics, but welcomes work from authors of theoretical, empirical, or field economic research if it would be of interest to the broader experimental economics community. The goal of Research in Experimental Economics is to be complementary with, and not in competition with, traditional journals as outlets for experimental work. Research in Experimental Economics has the freedom to consider papers that may not be appropriate for traditional journals for a variety of reasons. Some examples of these strengths include: theme volumes, replication studies, research which requires longer manuscripts for presentation of data or analysis, and papers on methodological topics. The volumes of Research in Experimental Economics are not tied to specific, recurring conferences. Typically, a volume theme is established with scholars who are willing to serve as volume-specific editors. The only constraint the senior editor places on the volume editors is that the papers should undergo a formal referee process using the same quality standards as traditional journals. Recent topics have included market power, charitable contributions, and field experiments.

A Brief History of Los Angeles: Conditions for Institutional Change

In order to understand what William Parker accomplished and how he did it, it is necessary to lay some historical groundwork about the history of the settlement of Los Angeles, the parallel history of its neighbor to the South (San Diego), and, of course, a detailed discussion of the pattern of corruption in Los Angeles in general and in the Los Angeles Police Department in particular. This is the task of Chapter 2. In the first section, we look at the historical rivalries between Los Angeles and San Diego. As later developments made Los Angeles the more economically dominant of the two cities, it is important to recognize that, early on, San Diego was perceived to be the city best situated for growth in Southern California. In the second section, we look more closely at the growth of Los Angeles as a deliberately designed process of self-selection, appealing to Midwestern immigrants with a strong religious and ethical orientation. Finally, in the third section, we detail the specifics of Los Angeles police corruption during the 1920–1950 period, with particular emphasis on the years 1938–1949.

Application to Economic Development

In Chapter 5, we return to the important motivation for the entire monograph. Much of the debate over corruption reform in developing countries has been about failure stories. Our analytical narrative focuses instead upon an enormous success in corruption reform, and lessons to be drawn from it. But this example occurred years ago and far away, in both distance and potentially in economic and cultural conditions, from contemporary developing economies. We do not intend to suggest that Parker’s specific reforms as such should be the guide for current corruption reform efforts. Parker’s specific policies were applicable to and successful for Los Angeles in the 1950s. What we do believe is that the conditions that we identified in Chapter 4 that supported Parker’s efforts can be generalized across time and circumstances. Thus, we examine the importance of political contestability, a free media, and a focal system of values in the context of the current debate over corruption reform in developing countries. We close with an application to the novel “Charter Cities” movement.

Essential Components of the Success of Parker’s Reforms

Because our core model is one of corruption reform as an equilibrium selection problem, it is important to analyze in detail the conditions that we believe helped William Parker, acting as what we call an “institutional entrepreneur,” to move from a high-corruption to a low-corruption equilibrium. In this chapter, we identify, and then explore in detail, four such conditions: internal contestability, external contestability, values, and media. These conditions are not discussed in abstract terms. Instead, for example, with regards to the first condition, we examine in detail the particulars of governance in California in the 1930s,’ 40s, and’ 50s that promoted internal governmental contestability. We attempt to provide the same level of specificity with regards to all of our four conditions.

Experiments with public goods: From cooperation to formation

Purpose – The purpose of this chapter is to serve as an introduction and motivation for Volume 13 of Research in Experimental Economics. In many cases, these introductory chapters are prefaces, limited to giving a roadmap of the volume and brief discussions of the chapters and why they were included. However, in some cases a more extensive discussion of the state of the literature and discipline can be useful. We have the same goal for this chapter. Methodology – The methodology is that of a literature review combined with an analysis of the development of issues of endogeneity, self-selection, and formation in laboratory experimental research on public goods, charitable contributions, and nonprofit organizations. Findings – This chapter traces the path of experimental public goods research as viewed through several lenses. There is a correspondence between the period of carefully controlled conditions in laboratory research and the framework of neoclassical economic theory (Lindahl/Samuelson). Indeed this is one of the original purposes of the earliest experiments by economists. However, there has been a distinct shift away from external control towards more endogenous evolution and selection over the past decade. Originality – There have been several surveys of public goods research (many are referenced in this chapter). To our knowledge, this is the first to set out the history of, and the imperatives for, this new direction.