The most common feedback that I receive when presenting my idea of the cooperative economy is that it is idealistic yet impractical. This is why I included a chapter in my book with a detailed business plan for implementing its design principles using algorithms (more information available on www.cooperativeeconomy.net). Still, there are those who say: “I won’t believe it till I see it.” I must admit that I am one of those skeptics. This is why, together with my colleagues at Bocconi University, I designed an experiment to test the core design principle of the cooperative economy.
This principle has to do with price subsidization, whereby high-earning consumers subsidize the consumption of low-earners in their community. This design principle can increase the purchasing power of low-income consumers while reducing economic inequality in communities. Per this principle, the digital platform can set product prices based on available income per capita. Hence, the platform would leverage software algorithms to transform a vendor’s uniform product price into a range of prices, so that high-earning consumers pay higher prices for the same product than low-earning consumers. The higher proceeds from high-earners can then subsidize the low-earners so that value is redistributed among consumers rather than captured by the vendor, who would earn the uniform price.
The price subsidization solution faces several challenges, however. For example, why would not low-earners free-ride and reduce their productive efforts? Would their enhanced purchasing power inflate consumption? Why would high-earners concede to paying higher prices? Why would not they purchase at the market price elsewhere? Would not a platform that relies on price subsidization be more susceptible to opportunistic behavior, e.g., under-reporting of income or arbitrage? These questions concerning the viability of the cooperative economy with its price subsidization mechanism can be answered in a field experiment.
Conceptually, the subsidization mechanism should work because participants in economic exchange are expected to behave prosaically once the system deters opportunistic behavior and establishes norms of reciprocity. Indeed, the cooperative economy attempts to align self-interest with community support via price subsidization, which reinforces prosocial behavior. Moreover, those who are subsidized are likely to reciprocate following the pay-it-forward principle that generates a sense of gratitude, while those who subsidize are likely to enjoy emotional benefits associated with prosocial behavior. Sounds convincing? Well, these ideas have never been tested in the context of an economic system, which is why a field experiment is called upon.
A field experiment should be conservative, to ensure that it is the design of the digital platform rather than the natural prosocial tendencies of participants or another intervening factor that drives results. Business and economics students would suit as participants because they have been freshly trained with the neoclassical economics model that underscores self-interest and maximization of profit and utility.
The idea is to develop a digital platform for purchasing items, such as a meal at a restaurant, with two groups to which students would be randomly assigned. One group would pay the fixed market price for a purchased item, while the other group would feature prices that vary with personal income, so that high-earners subsidize low-earners. Then we can compare the behaviors in these two groups – Is participation and economic activity in the subsidization group as high as in the control group? Do high-earners spend sufficiently to subsidize the low prices paid by low-earners? Do subsidized low-earners overconsume relative to those in the control group? Of course, participants should be assigned randomly to the two groups, and their budget should be also randomly assigned for this experiment to work.
The digital platform should also allow for the participants in the experiment to misreport their income to account for opportunistic behavior, but such behavior should be discouraged on the platform. Would misreporting of income increase with subsidization and result in the collapse of the proposed solution? Also, would not price subsidization simply substitute for traditional forms of community and personal donations? Those can be also incorporated as part of the design of the experiment. Eventually, the question is whether prosocial behavior and satisfaction with the cooperative economy solution will be as high as in the control group.
Clearly, the core ideas underlying the cooperative economy can be empirically tested. The key question is would the cooperative economy thrive? If you wish to learn the answer to this question, you are invited to one of my upcoming seminars or can subscribe to my newsletter.