Reference point adaptation and air quality – Experimental evidence with anti-PM 2.5 facemasks from China

Zhang, nan and Qin, Botao (2020): Reference point adaptation and air quality – Experimental evidence with anti-PM 2.5 facemasks from China.

Abstract

The formation of reference points has drawn increasing interest ever since the introduction of prospect theory. Given that most studies focus on tradable goods such as stocks, for which the prices are observable, while few have focused on environmental goods. This paper attempts to fill this gap in the literature in this regard. In our experiment, we divided the subjects into buyers and sellers and asked them to trade four PM 2.5 filters using the Becker–DeGroot–Marschak mechanism. We have two treatments in this experiment: a) the experience of seven weeks of heavy air pollution; and b) the receiving of information on the relationship between death rates and air pollution. The different bidding prices for the four PM 2.5 filters in these treatment groups make it possible to trace the adjustment of the reference points as a result of these treatments without having to know their precise values. Our results show that, for buyers, the heavy air pollution drives them to fully downwardly adjust their reference points on air quality. For sellers, however, the reference points adaptation caused by heavy pollution is not a full adaptation. Moreover, the new information on the damage to health from air pollution causes buyers to upwardly adjust their reference points on air quality but does not significantly change the sellers’ reference points. We show that, for both treatments, sellers are more reluctant to adjust their reference points on air quality than are buyers. Our results confirm the asymmetric reference point adaptation in that adaptation after a loss is harder than adaptation after a gain.

• Item Type: MPRA Paper
• Language: English
• Keywords: prospect theory; reference point; asymmetric adaptation; air pollution; BDM auction
• Subjects: C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C90 - General; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D44 - Auctions; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q53 - Air Pollution ; Water Pollution ; Noise ; Hazardous Waste ; Solid Waste ; Recycling

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