Strategy Adjustments in Games with a Dynamic Public Bad: Experimental Evidence

We investigate whether and how subjects adjust their strategies over time in a finite-horizon game with a dynamic public bad. Every period, subjects choose a production level that generates an immediate private benefit but also a proportional negative externality that imposes a cost on all group members. Such "emissions" partially carry over to future periods and thus can accumulate and impose increasing costs. Previous studies estimated behavioral strategies in this environment by assuming that the effect of others' past choices on decisions is constant over time. We find evidence of strategy adjustment, and that it is affected by experience, context and environmental state variables. Overall, subjects' decisions are not affected by choices of others initially, when they are learning the environment, but reciprocity becomes significant with experience.