Individual responsibility and the future of the welfare state

As far as we the link between social preferences for redistribution and individual responsibility is concerned, there are two questions which are worth being investigated. The study of these questions is the focus of the present research project. The first one sounds as follows: is it true that intensifying the focus on personal responsibility is the right way not to loose political support for welfare (redistributive) policies? In other words: are voters more willing to contribute to finance a welfare system in any case in which such a system does not depress individual incentives to be responsible? Are voters more willing to contribute whenever they perceive that an individual is in need due to bad luck rather than poor effort? The second question is related with an argument recently put forward by behavioural economists (e.g. Gintis et al., 2005). According to a long standing tradition which can be traced back to David Hume’s Treatise of Human Nature, in designing institutions it is wise to move from the assumption that any man is a knave and that he is only motivated by narrowly-defined self-interest. According to this view, individuals respond to incentives in such a way as to maximize their satisfaction without having any concern for the type of incentives actually in place. In other words, it does not really matter whether the kind of incentives are based either on premiums or on punishments (e.g. Besley and Coate, 1992). Among others, Samuel Bowles (2008) argues against this view, maintaining that moving from the hypothesis that any individual is a knave leads to policies which favour this undesirable behavioural trait to spread within the population. Indeed, as certain kinds of incentives depress individuals’ motivation to conform to social norms of cooperation, they play an adverse role, leading to results not in line (or even contrary) to the expectations. So the question arises whether to foster personal responsibility it is better to device incentive mechanisms based on premiums rather than on punishments. Scattered evidence based on recent welfare programmes suggests that premiums may actually be more effective. Our project aims at studying the link between individual responsibility and social preferences for redistribution in an experimental setting. The use of such a setting carries with it two big advantages. The first is that of placing individuals in a framework in which noises disturbing the observation of those aspects of human behaviour we are interested in investigating, can be controlled or removed. The second is that real-world experiment concerning the effort that individuals on welfare rolls exert to escape from their condition of need, are both very costly and very difficult to perform (e.g. Martin, 1998; Calmfors et al. 2001). In what follows we do not go deeply into the details of the experiment. We limit ourselves just to explain its main characteristics. Our intention is to devise an experimental setting in which individuals might experience a productivity shock. The probability of such a productivity shock can be independent from individual effort (that is: from her responsibility) - in this case it would be entirely due to bad luck – or it can be affected by the individual effort. Individuals are of various types. Each type is characterized by a different probability of experiencing a productivity shock. There are different settings: individuals may, or may not, know their type and the distribution of types within the society. In any case, individuals vote to choose, under the majority rule, the tax rate which applies to income. Once a given tax rate is in force, each individual pays the fraction of his income corresponding to the income tax rate, and revenues are equally distributed among the participants to the experiment. 3.1. The Baseline treatment In the baseline treatment, individuals cannot affect in any way the probability that a bad event occurs, so nobody can be held responsible for the reduction in income he experiences. In the baseline treatment we study the evolution of social preferences, as expressed by the level of redistribution, and compare it with the one that would be realized under complete ignorance about the distribution of both endowments and types. In this respect we try to elicit individual’s preferences for redistribution under a veil of ignorance (e.g. Konrad and Morath, 2011). We consider this test as important. If the homo oeconomicus assumption holds, something which has been deeply questioned in recent years (e.g. Heinrich et al., 2001), we should expect that under the veil of ignorance, due to risk aversion, those individuals that in the complete information case have a low probability of experiencing a productivity shock, should vote for a substantially higher tax rate. If such an assumption does not hold, and other-regarding preferences matter, then the level of redistribution observed across the two different settings should be fairly similar. The setting just described will then be manipulated as to allow individuals to perform a costly effort which can affect the probability of experiencing a productivity shock. Such an effort can be meant for example as an investment in education (e.g. Bruce and Waldman, 2001). The setting shares some characteristics with the public good game (e.g. Fehr and Fischbacher, 2003). There is clearly a free-rider problem here: individuals with a greater probability of experiencing a productivity shock may not exert the costly effort to reduce such a probability, trying to exploit the benevolence of their fellows. However, as soon as this kind of behaviour becomes known, there are grounds to argue that the income tax rate (hence social preferences for redistribution) on which individuals agree upon, shrinks. Individuals with an high probability of incurring in a probability shock do not contribute; this depress the incentives that others can have in helping them (possibly this can also depress their other-regarding preferences). In the third setting we alternatively provide different incentives to stimulate individual responsibility. These incentives can take the form either of premiums or of punishments. As for example (but this is what has to be studied): under the premium treatment, for any unit of endowment invested to reduce the probability of a productivity shock, the experimenter add a share s of his own; under the punishment treatment, the same share s is subtracted to the individual income for any income unit of loss. We study whether different types of incentives have a differential impact on individual responsibility and how social preferences for redistribution evolve.