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.
In my lockdown isolation in northern Italy, against the devastating backdrop of COVID-19, I took some time off to sit down and revisit the frameworks I have been teaching my MBA and executive students for a couple of decades. How come? Well, in a world facing growing inequality, the dominance of a few major platforms, ineffective economic policy and regulation, the exhaustion of natural resources, social unrest, and the unprecedented economic impact of the pandemic, I became increasingly convinced that our economic system was broken and no longer fit for purpose. Despite any benign intentions, it had become an entrenched framework that made it possible for a few opportunistic, well-informed actors – best illustrated by the Big Tech companies and their platforms – to game the system at the expense of the well-being and prosperity of everyone else, with dire consequences for our planet and our society. I wanted to think about how business school professors like me could train future leaders to build a global economy that better served the needs of our society and the generations to come. This led to further reflections about what that economy should look like and how it would function. Research tells us that most people are, by nature, prosocial rather than opportunistic, so how did we get to the point where our economic system so heavily favors the opportunism of a few over cooperation in communities and our society at large? After a period of exploration, my prognosis was rather pessimistic for those who believe we just need to tweak or amend our existing economic system to fix things. In my book, The Cooperative Economy, I identify five grand challenges the current economic system has enabled and explain why that system cannot be reformed. In this article, I explore those five challenges and propose a vision for a new, platform-based economic system. I discuss how this system might work in practice and how we could address any pitfalls in its execution. To read the article visit I by IMD Issue 13 article
I am thrilled to announce that the Italian translation of my book “Economia Cooperativa” is now available for purchase here. The book has an updated preface and fine Italian style! The book is published by Bocconi University Press (EGEA) which invested much in the translation to ensure its accuracy and coherence.
A webinar introducing the book will be held live on YouTube on March 25 at 17:30 Italy time. Joining me in this event are Carlo Salvato from Bocconi University who will moderate the discussion and Tommaso Valletti from Imperial College London who will discuss the challenges imposed by the Big Tech firms and the shortcomings of regulation as a backdrop to my discussion. My book offers a possible solution to these challenges in the form of a digital platform that leverages design principles to promote prosocial behavior. The webinar will be held in Italian with the exception of my part which will be held in English (I wish I could do this in Italian). Here is the link to the webinar. Grazie!
Readers of my book were invited to take part in a simple experiment. The $5 experiment examines a core idea of the cooperative economy – that of prosocial behavior. Would individuals be willing to promote the welfare of others at a cost to oneself? The experiment was designed to reveal if participants feel happier giving or rather receiving money.
The experiment was framed as following:
“Find a homeless person or a beggar in your neighborhood or town, and to the extent that you believe that this individual is truly in need, give them five dollars or the equivalent in your local currency. Once you have done so, proceed and meet a colleague or a friend and ask them to give you the same amount of money.”
Based on the 55 anonymous responses thus far, 93% reported feeling happier giving money with only 7% reporting being happier receiving money (see chart).
Of course, there could be a selection bias here because most of those who showed interest in taking part in this experiment are readers of my book who identify the problems with our current economic system and recognize the need for revisiting the principles of economic exchange. They are more likely to be prosocial.
For that reason, it is useful to consider the results of other experiments using randomized samples. For example, Flynn, Ehrenreich, Beron, & Underwood reported in their 2015 study of prosocial behavior in the Review of Social Development, that about 30% of the participants revealed a high inclination for prosocial behavior, 53% showed a medium level and the remaining participants exhibiting low levels of that inclination (see chart).
The fact that most of the population has medium-to-high inclination for prosocial behavior gives hope that by redesigning the economic system we can expect such prosocial behavior to overpower opportunistic behavior.
To learn more about my proposed design, visit www.cooperativeeconomy.net
If you wish to participate in the $5 experiment, you can complete it on my book’s website: https://cooperativeeconomy.net/5-experiment/
