Part 1: Standard Economic Theory, Behavioral Economics, and Public Goods

Sakshi Upadhyay is a fourth year Ph.D. student in the Department of Economics and a summer research fellow at the Kellogg Center for Philosophy, Politics, and Economics at Virginia Tech.

Sakshi’s area of interest lies in understanding human behavior in the sphere of public goods provision in a society. Additionally, her research sheds light on how coalitions are formed among agents in a society.

This is a series of articles about Sakshi’s research interests, economics as a discipline, the methods and importance of experimental economics, and Sakshi’s most recent work. Please feel free to contact Sakshi if you are interested to learn more about her work.

Part 1

Standard economic theory. Standard economic theory is based on the assumption that consumers are rational and aim to maximize their utility. A rational person will know what is best for them (selfish motive) and will not be influenced by emotions or other external factors while making a decision.  However, such human behavior is far from reality. Our actions are strongly influenced by our emotions and often defy the notion of rationality. Adam Smith also did not believe that only selfish motives matter for individuals. In his first book, The Theory of Moral Sentiments, Smith wrote, “How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it” (Smith 1759: 3).

Behavioral economics. To analyze human behavior more innately, economists employ the principles of behavioral economics which unites theories of both psychology and economics to explain irrational choices. Over the years, various models have been developed which explain that individuals’ actions are not only motivated by their own selfish motives but are also driven by their empathy towards others. Such behavior exists not only among agents at a micro level but is also prevalent among agents at the macro level; for example, countries engaging in trade treaties. The deciding factor behind such trade deal lies in fundamental problem of profit maximization which forms the core idea of models in economics. Apart from the profit maximization motive, a country also engages in treaties with another country to uplift the latter’s economy through trade.

The scope of economic models. Therefore, models of economics can be applied to study various problems which stretches far beyond the realm of my immediate research.  Over the past three decades, models of economics have been borrowed to study areas of education, health, environment, labor, information, conflict, political economy. The pool of research is rich in both theoretical and empirical advancements.

Research interests. My broader research interest lies in applied game theory, behavioral economics, and experimental economics. My dissertation focuses on public goods and how coalitions can be used to increase contribution to a public good game. The study uses both theoretical and experimental methods to incorporate social preferences into the study of coalition formation and how such coalitions affect the provision of the public good.

Public goods. Public goods simultaneously benefit many people and are vital in creating a well-functioning society which will also foster economic growth.  Environmental protection, research and innovation, health and education are a few of many important examples of public goods.  Theoretically, pure public goods are goods that are non-rival, meaning that more than one person can benefit from them at once, and non-exclusive, meaning that it is difficult to stop any individual from enjoying their benefit. These features of a public good pose two immediate problems. First, how much of a public good to produce and how to pay for it.  Second, since public goods are non-exclusive, there is a strong individual incentive to “free ride” and enjoy the benefits of the public good without paying.

To eradicate these problems, my research studies ‘coalitions’ which are subgroups of individuals agreeing to act collectively to produce a public good.  My research dives into the fundamental theories of behavioral economics and finds the key conditions which will form coalitions and how such coalitions will generate an efficient public goods production and provision. I hope that my attempt will succeed in attaining a general solution for producing all forms of public goods.

Please click here for Part 2 and Part 3 of this series.

Smith, Adam. The Theory of Moral Sentiments (Liberty Classics). (1976).

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