Kyoto _1a_ ACEI Public Dimensions Srakar Copic

7/31/2019 Kyoto _1a_ ACEI Public Dimensions Srakar Copic

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Public Dimensions of Private Investments in Culture: The Non-Use Value Argument

Approach*

Andrej Srakar,Vesna opi

STILL PRELIMINARY PLEASE DONT QUOTE

Support to private investments in culture is subject to a lot of attention lately due to lack of

public funds in times of economic crisis. It is often claimed that private funds are substitutes

for public funds being able to substitute for the lack of public support. We show that private

provision of culture (as non-excludable public good, e.g. public sculpture) is subject to

influence of non-use values of the donators. We show that private provision of public good

equilibrium with users and non-users is Pareto inefficient and that therefore private provision

of non-excludable cultural goods should be subject to considerations of public intervention.

We furthermore show that the equilibrium including non-use valuers is always more Paretoinefficient than the equilibrium with only use valuers. We are also able to show some

important comparative statics results about the level of users and non-users donations. The

main novelty of the paper is modeling of non-use values in showing that not only free-riding

(Samuelson 1954), reciprocity (Sugden 1984) and altruism (Andreoni 1990) can be reasons for

Pareto efficiency considerations in the private provision of public goods. The arguments are

supported by econometric evidence using dataset previously used for contingent valuation

study of international sculpture symposium Grosuplje - City of Sculptures.

Keywords: private investment, cultural sector, non-use values, externalities, public goods

1) Introduction and backgroundThe literature on economics of and support to private investments in culture is gaining ground and

becoming more and more important during times of economic crisis. In the surge of economic crisis,

many governments are starting to use to the rhetoric of private investments being the solution to the

necessary decline in public funds for culture. Mixed-funding economy, consisting of public support,

private support and earned income (where often the share of each is supposed to be equal), serves as a

supporting argument for the raised attention given to private funds. As showed by Srakar and opi

(forthcoming) many arguments show that this attention does not come without problems. Firstly, it is

not clear whether public and private funds are in a relation of crowding-out or crowding-in. If the

latter relationship holds, more attention given to one kind of funding should be supported by more

attention being given to the other kind as well. Secondly, shares of public and private funds are

sometimes positively correlated, and move in the same direction, which is the case during times of

* This research has been partly written with support from the Fulbright Scholarship Grant given to the corresponding author for the year2011/12. The corresponding author thanks the Institute of International Education and School of Public and Environmental Affairs, IndianaUniversity Bloomington for their kind support.Corresponding author. Email: [email protected]. PhD Student and Teaching Assistant, Faculty of Economics, University of Ljubljana,

Ljubljana, Slovenia and Fulbright Visiting Scholar 2011/12, School of Public and Environmental Affairs, Indiana University Bloomington,

USAAssistant Professor, Faculty of Social Sciences, University of Ljubljana, Ljubljana, Slovenia


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economic crisis when often the decrease in public funds is accompanied by a simultaneous decrease in

private funds. In such cases, the diversification of funds would not be an optimal solution to thewithdrawal of state support. Thirdly, as we will demonstrate in the article, private investments are not

pure market mechanisms, as imagined by both their proponents as well as their critics. Most of their

forms are inextricably connected to the expressing of non-use values, which are fundamental for the

valorization of a certain good as a public good and are the cause of Pareto inefficiency of privateprovision of cultural goods by donations as will be shown in the article.

During the economic crisis it is most probable that all the resources available to support for culture are

reducing in amount and level. Empirical data show that during the crisis both private as well as public

funds are reducing in amount (e.g. Inkei 2011). The analysis by Srakar and opi (forthcoming)

showed that the level of public expenditure for culture (data for the EU countries taken from

Compendium of Cultural Policies and Trends in Europe) and level of general charitable giving (data

taken from the World Giving Index 2011) for EU and some other developed countries in the world is

positively correlated.

This shows a statistically significant positive correlation between public cultural expenditure per

capita and charitable giving as one tends to rise the other tends to rise as well, yet as one starts to fall

the other will most likely fall as well. A short regression analysis, done for the same article, showed

that almost all of the variance in the relationship can be explained by the countrys well-being. This

therefore shows that it is expected that during the times of economic crisis when the well-being of the

country falls, the level of both public cultural expenditure as well as charitable giving will tend to

drop. If one therefore wants to substitute the public expenditure with private funds one has to take into

account this relationship and not just count with private funds as perfect substitutes for the level of

public cultural expenditure.

As shown in study for the European Parliament on encouraging private investments in culture in the

EU (opi et al. 2011) most of the European Union countries have some sort of public support

measures (e.g. tax rebates or credits for individual and corporate donations, lower VAT rates, support

to foundations, Arts & Business Forums) to private provision of culture, yet the level of raised funds is

often very low. The authors of the study attribute this fact to poor implementation of the measures. Yet

one could ask whether it was the chicken or the egg, who came first. Is it the poor implementation

(e.g. not enough knowledge about measures, discordance with the tradition of contributions for culture

in the country) that is the reason for the low level of raised private funds or is it the low level of

possible and actual raised private funds that causes the low level of knowledge among the potentialcontributors? In any case our analysis will provide reasons for public support for such mechanisms,

therefore the reasons for inefficiency of the market for voluntary provision of culture and therefore

reasons for state intervention either via direct or indirect subsidies to support the efficient provision of

cultural goods in society.

One is tempted to ask if we are able to confirm for presence of non-use values of donators. As shownby Srakar and opi (forthcoming) the basic characteristics of non-use values would tend to confirm

this conjecture. Such investments are considered as one-sided business transactions from which thedonor expects no direct benefit. Therefore they cannot be linked to any use benefit, but only to non-

use (as well as cultural) values. Put another way, the amount of donation reflects mostly the non-use


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values of the donator, as he gains no direct benefit or return for his gift. Similar account holds for the

motives of most private investments in culture as shown by Srakar and opi (ibid.).

One is therefore obviously facing a difficult question: can we prove that non-use values are indeed

acting in the same way as in contingent valuation studies where they are often accounted for as reasons

for externalities of cultural good provision and therefore a sufficient reason to speculate aboutnecessity of public intervention. Can we therefore prove that non-use values are reasons for

externalities and Pareto inefficient equilibria in provision of cultural goods by donations?

We will try to address this question in our article. In second section we will present the short literature

review of main findings in the field. In the third section we will develop a microeconomic model to

help us get better insight into the influence of non-use values on private provision of cultural goods. In

this section we will also prove that private provision of public goods including non-use valuers is

always more inefficient than simple provision with only use valuers. In the fourth section we will

present some basic comparative statics results from the model in section three and show the basic

economic structure of users and non-users donations. We will try to test the findings in a short

econometrical study using data from contingent valuation study of symposium Grosuplje City of

Sculptures. In the fifth section we will therefore present the data and basic methodological

considerations. In the sixth section we will present empirical results of the model. In the final section

we will conclude with a discussion of the findings.

2) Review of literature and basic conceptsThe literature on private investments in culture is concentrated on general considerations of financing

of culture (e.g. Klamer, Petrova & Mignosa 2006), advocacy of mixed economy and diversification ofresources (as exemplified in numerous reports for UK Arts & Business Forum), and consideration of

specific mechanisms of private investments in culture (e.g. opi et. al 2011). Private investments in

culture (including earned income) usually consist of four main forms. Business support denotes direct

investment aimed at capital returns, including public-private partnerships and investments in art

collections, as well as sponsorship and corporate donations. Individual giving encompasses all

transactions made by individuals, with the purpose of donating or contributing to culture. Individual

giving should be distinguished from household expenditure for culture, which falls under the category

of earned income. Support from foundations and trusts, which is a third form of private support, is

rapidly spreading in Europe. Such support denotes support from intermediary institutions, usually

founded by law, that serve special purposes and missions and are supported by private endowment.Earned income finally includes all individual spending for cultural purposes, e.g. entry fees to cultural

institutions, selling of cultural objects, etc. Earned income therefore denotes all direct income made by

cultural organisations by selling on the market (cf. Srakar & opi forthcoming).

The concept of total economic value which included both use as well as passive- or non-use values

firstly formally appeared in an essay by Peterson and Sorg (1987). It elaborated that total economicvalue is not only use value; it is given by the sum of use and non-use values referring to intrinsic

benefits, i.e. those deriving from the mere existence of environmental goods. But the first economistwho identified the total economic value double feature was already Krutilla (1967). After Krutilla the

scholars interested in this topic have not been limited to theoretical analysis of the total economicvalue and of its components, but their attention has been centered on an empirical analysis which


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allows them to identify the main features especially of non-use value and the different methods usable

for their measurement.

Non-use value is basically defined as value that covers situations in which individuals who do not

make use, or intend to make use, of any given environmental asset or attribute would nevertheless feel

a loss if such things were to disappear (Turner 1999). Frey and Pommerehne classify non-use valuesinto bequest, existence, prestige, option and educational values (Frey & Pommerehne 1989).

Sometimes also altruistic values and vicarious consumption are included in the classification of non-

use values (Bille Hansen 1997; Throsby 2001). As noted by Bille Hansen (1997) and shown by Srakar

(2010) and Srakar & opi (forthcoming) whenever the existence of non-use values is shown one can

speak about the beneficial externalities argument (Baumol 2003) and therefore reasons for public

support to culture. It has been furthermore noted by Brooks (2006) that non-use values are at present

an unexplored and unsubstantiated (yet promising) argument for public support to cultural goods.

It is the empirical focus which is characteristic of the studies of non-use values in most of the

literature. Most of the literature has been focused on measurement of non-use values in so-called

contingent valuation studies, consisting of asking selected samples of population what is their

maximum willingness-to-pay (or willingness-to-accept) for a certain public, quasi-private or private

good in question. Contingent valuation studies started with the work and idea of Ciriacy-Wantrup

(1947), yet the first one to actually use the method was Davis in 1963. Contingent valuation gained

most ground with the accident of Exxon Valdez tanker in 1989 and the following discussion which

lead to so-called Blue Ribbon panel report, chaired by two Nobel laureates Kenneth J. Arrow and

Robert M. Solow. This report and its main finding that CV (contingent valuation) produces estimates

reliable enough to be the starting point of a judicial process of damage assessment, including passive-

use (i.e. non-use) values (Arrow et al. 1993: 4610) sprinkled a number of the following contingentvaluation studies mostly proving that non-use values are an important part of total economic value of a

certain goods provision, sometimes even a decisive part.

The literature on contingent valuation studies and non-use value measurement in cultural economics is

quite large, although most of studies were made after 1992 (as noted by Noonan 2002). First such

studies were made by Throsby and Withers in the beginning of the 1980s. The variety and topics

covered in such studies range from a wide variety of sources (as noted by Pearce et al. 2002). Probably

one of the best known studies has been made by Danish researcher Trine Bille Hansen (Bille Hansen

1997) who proves that non-use values are the decisive part when valorizing the total economic value

of Danish Royal Theatre in Copenhagen. Many of the most important contingent valuation studies inculture have been collected in a compendium edited by Navrud and Ready (2002).

Economic research of the private provision of public goods has its start in the work of Wicksell and

Lindahl who analyzed its basics and pointed to different solution concepts nowadays known asLindahl equilibria. Yet perhaps the most influential article in this field has been written (on only three

pages) by Paul A. Samuelson in 1954. This article provided first mathematical foundations for analysisof provision of public goods and already pointed to the so-called free-rider problem in the possible

private provision of public goods. This problem has been further analyzed by Samuelson (1955),Buchanan (1968) and most of all Peter G. Warr who managed to show that incremental fiscal

redistributions among donors cannot achieve a Paretian welfare improvement and that therefore publicsubsidies and private contributions tend to crowd-out each other in relationship exactly 1:1 (Warr


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1982). This finding has been mathematically confirmed and extended by Bergstrom, Blume and

Varian (1986), who also stressed the dependence of Warrs results on assumptions in his article.Warrs results have been further relativized and disconfirmed by number of the following empirical

studies (e.g. Abrams & Schmitz 1978, Clotfelter 1985, Kingma 1989, Ribar & Wilhelm 2002), and

some authors were even able to find the evidence for crowding-in effect in certain circumstances (e.g.

Brooks 2003). This has lead to speculations about other effects besides pure self-interest in the privateprovision of public goods. Most notable contributions in this field are probably Sugden (1984) who

considers reciprocity in the form of Kantian economic principles and Andreoni (1989; 1990) who

proves the importance of altruism and warm-glow (self-interested) altruism in the private provision of

public goods. According to the latter it is important to take into account the different forms of altruism

and therefore include beside the satisfaction with private and public good consumption also

satisfaction with the own given donation, which is labeled by Andreoni as warm-glow giving

(Andreoni, 1990).

3) Model private provision of non-excludable public good for users and non-usersWe model the donations to culture as private provision of non-excludable public good for both users

and non-users. Our basic model is stated below.

Each user tries to solve the following optimization problem:

max,, , , + ,0 ,1. . + = 2

+ = 3

Each non-user tries to solve the equivalent problem:

max,, ,0 ,4. . + = 5

+ = 6

where:

utility function of the user

utility function of the non-user level of private good consumption of the user level of private good consumption of the non-user total provision of the public good public good contribution of the user public good contribution of the non-user total provision of the public good less the contribution by individual user total provision of the public good less the contribution by individual non-user wealth/income of the individual user wealth/income of the individual non-user


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, , means utility function of user with level of private good consumption , level of publicgood consumption , contribution (donation) to public good of, and satisfaction for the providedlevel of public good this is therefore the use value of the user ,0 , means utility function of user with level of private good consumption , level of publicgood consumption 0, contribution (donation) to public good of

, and satisfaction for the provided

level of public good this is therefore the non-use value of the user ,0 , means utility function of non-user with level of private good consumption , level ofpublic good consumption 0, contribution (donation) to public good of, and satisfaction for theprovided level of public good this is therefore the non-use value of the non-user

We assume that the marginal rate of transformation from private good to public good equals one (this

assumption which is used for the ease of proof would change nothing significant if it would not be

satisfied and is commonly assumed in similar public economics models).

We also presuppose that:

, > 0, , 07 > 0, 08

, > 0, , 09 , > 0, , 010

where ( denotes the first order derivative of users (respectively non-users) utility functionover private good consumption, denotes the first order derivative of users utility function overconsumption of public good,

(

denotes the first order derivative of users (respectively non-

users) utility function over satisfaction with the level of public good provision and (denotesthe first order derivative of users (respectively non-users) utility function over warm-glow satisfaction

with her donation (used in the model with warm-glow giving at the end of this section). , ,, , , and denote the respective second order derivatives.

The Lagrangian and the first order conditions for the user are:

= , , + ,0 , + 11

= 2 = 012

=

= + 2 = 013

Calculating the marginal rate of substitution between private and public good for the user gets theusual condition:

=

= + 2

2= 114


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where by we denote the total marginal benefit of private good for the user and by the

total marginal benefit of public good for the user.

The Lagrangian and the first order conditions for the non-user are:

= ,0 , + 15 = = 016

=

= = 017

Marginal rate of substitution condition is again the same:

=

= = 118

By solving the model by fixing the utilities of all other individuals other than the individual user/non-user (see e.g. Salani 2000), one gets:

max,, , , + ,0 ,19

, , + ,0 , , 20 ,0 , ,21 . .

+

= 22

,,

+ ,,

= 23

where denotes the cumulative wealth of all individuals (the wealth of the society).

By solving for individual user one gets:

= , , + , 0 , + , , + ,0 ,

+ ,0 ,

+ ,,

+ ,,

24

and the first order conditions (we use the normalization of = 1):

, = , , , = 0,,25


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where, , denotes the total marginal utility of private good consumption of an individual

user/non-user (, , equals 2 for the user and for the non-user),

, = ,,

, = 0, ,26

where, denotes the total marginal utility of public good (consumption and satisfaction) of an

individual user/non-user (, equals + 2 for the user and for the non-user)

Solving gets the usual Bowen-Lindahl-Samuelson condition (see e.g. Salani 2000):

+

= 127

Obviously (14), (18) and (27) are in contradiction, which gains the usual Samuelsons result of the

Pareto inefficiency of private provision of public good equilibrium. As observed by Samuelson this

simply means that the marginal valuation of the public good is higher than the Pareto optimal

valuation which results in externalities and free-riding with the result of undersupply of public good as

compared to socially optimal level of provision.

By construction one can see that the equilibrium with including non-use values is even moreinefficient as one has to take into account also the marginal rates of substitution of the non-use valuers.

This of course causes even larger disparity between the sum of (14) and (18) as compared to (27). Asone assumes that non-use valuers are commonly a larger group of population than users (despite

commonly having smaller willingness-to-pay for the public good) this disparity can be important. It isalso interesting to see that the additional non-use values of the users dont contribute to the

inefficiency of the equilibrium in Samuelsons sense.

It is interesting to see what would happen if one also takes into account the warm-glow giving

component of the utility function, therefore taking into account the satisfaction of donor with her owndonation. It would be likely to assume that non-users, being driven by non-consumption motives,would tend to give larger importance to their warm-glow giving component, therefore to the shear

satisfaction with their act of good will. It is therefore interesting to observe what would happen in theadjusted equilibrium under such propositions. The basic two models become:

USER

max,, , , , + ,0 , ,28. . + = 29

+ = 30


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NON-USER

max,, ,0 , ,31. . + = 32

+ = 33

where there is the additional fourth component of the utility function taking into account thesatisfaction of user respectively non-user with the own given donation. As suggested by Andreoni

(1990) this part of the utility function acts as an additional private good, being dependent on egoistic

component in the sense that it depends primarily on individual preferences and not on the

community/public valuation.

The marginal rates of substitution for both user and non-user in this model become:

, = 1

,,, ,

34

where again, , denotes the total marginal utility from warm-glow giving of an individual

user/non-user (, , equals 2 for the user and for the non-user).

The adjusted Bowen-Lindahl-Samuelson condition for the model including other users/non-users

valuations would be:

+

= 1

, ,

, ,,,35

By inserting the values from (34) and assuming there are users and non-users, one gets:

+ = 1 +

, ,

, ,36

Summing these conditions for all users and non-users and ordering up one gets the following condition

for Pareto efficiency of the equilibrium:


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+ =

, ,

, ,,37

Because of the first-order conditions over private and public good and assumptions (7)-(10) it has tohold:

, , 0). The interpretation of the

result in (43) is also clear. The more diminishing ones total marginal utility function over is thegreater would be the denominator in (43) and therefore the lower the amount given to donation from

ones additional wealth. Therefore if ones total marginal utility for the public good is diminishing

faster than the total marginal utility for consumption of the private good, one would give

proportionally less amount from a one unit increase in wealth to a donation for the public good than to

private good consumption. The reverse holds in the opposite case.

The equivalent conditions for the non-user are:

NON-USER

= ,0 ,44

= + = 0 45 = + < 046

= 47

=

= + 48

It is again obvious that donations of the non-user are normal goods as well ( > 0). The

interpretation of (48) is again the same.

From these results one is able to get results which are summarized in the below propositions:

Proposition 1: The users level of donations will be greater than the non-users in the equilibrium

with no warm-glow giving. This is not necessary to hold anymore in the equilibrium with warm-

glow giving in which case the relationship depends upon difference in marginal valuation of warm-

glow giving and marginal utility from consumption of the public good.

Because of (40) and (45) it holds:

2 + + 2 = + 49

We can assume that the utility over satisfaction with public good doesnt depend on one being user ornon-user (it does not depend on utility over consumption of public good). We can therefore assume:


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2 = 50

Because of assumption (8) it therefore holds (in equilibrium):

2 = > = 51

But because of assumption (7) the marginal utility of private good consumption is decreasing in .This means that in equilibrium user chooses a smaller level of the private good consumption .Because it is assumed that public and private good are perfect substitutes (the budget constraint) this

also means that the level of has to be greater for the user in the equilibrium, which shows the firstpart of the proposition.

In the model with warm-glow giving (28)-(33) the equivalent result to (49) is:

2 + + 2 + 2 = + + 52

Identity (50) is valid in this case as well of course. This shows that the equilibrium donation of the

non-user can be even greater than the users donation if the difference in marginal valuations of warm-

glow giving ( 2) is greater than marginal utility from consumption of public good ().This is of course rare to happen which explains why we most commonly observe greater donations

from the users.

Q.E.D.

Proposition 2: Ones total marginal utility of consumption of the private good is higher for the user

than for the non-user in the equilibrium with no warm-glow giving. Also this total marginal utility

tends to diminish faster for the user than ones total marginal utility for the non-user in the

equilibrium with no warm-glow giving.

First part of proposition is already summarized in (51). To prove the second part we use Proposition 1

which states that (43) has to be greater than (48). Therefore:

= 22 + + 2 > + = 53

By differentiating the expression in (50) over we come to:

2 = 54

Denoting the value of expression in (54) as one comes to the inequality:

This of course assumes that user's and non-user's have the same utility functions over consumption of private good, or at least that they arenot related to being user or non-user (the components of utility function are not related).


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2 > + 55

Because obviously the term on the right of RHS is greater in absolute value (lower in real terms,

because it is negative) than by assumption (8) it has to hold:

= 2 < = 56

which proves the proposition.

Q.E.D.

Proposition 3:

1) The extent of crowding-out effect depends upon the level of second order derivatives. In themodel with no warm-glow giving there is always crowding-out.

2) Crowding-out effect is always greater for the non-user than the user in the equilibrium withno warm-glow giving.

3) Including the warm-glow giving always lowers the extent of crowding-out. Crowding-ineffect is possible if marginal utility of warm-glow giving declines very fast in comparison to

marginal utility of public good consumption and satisfaction.

Calculating the crowding-out effect from the second order derivatives gives:

=

+ 22 + + 2

57

= + 58

It is obvious that both of these terms are greater than minus one and lower than zero which shows the

first part of the proposition.

To show the second part we use equation (55) and add some positive terms on LHS and RHS to get:

2 + + > + + + 59

which is equivalent to:

2 + + > + + 60

and finally:

+ >

+ 2 + +

61

Using (57) and (58) this indeed shows that:


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>

62

which (because both terms are between 0 and 1 by previous consideration) shows the second part ofthe proposition.

By including warm-glow giving in the model (1) - (6) gives the following expressions for the

crowding-out effect:

=

+ 2 22 + + 2 + 2

63 =

+ +

64

Because of assumption (10) expression in (63) is indeed greater (closer to zero) than (57) (numeratoris smaller and denominator is greater) while the same holds for expression in (64) (being greater than

expression in (58)). This shows that crowding-out effect is indeed smaller when warm-glow giving is

taken account of. It is interesting that in some cases when the marginal utility from warm-glow giving

is declining sufficiently faster for the non-user than the user the crowding-out effect can be lower for

the non-user than the user. Perhaps one could explain this observation by the fact that the steeper

decline in marginal utility over warm-glow giving is associated with greater level of donations (see

proof of Proposition 1), which also means greater level of (total) public good provision and therefore

the steeper decline in public good marginal utility as well which would tend to reduce the impact of

decline in warm-glow giving satisfaction.

It can be also observed that if the second order derivative over warm-glow giving is sufficiently high

(higher than second order derivatives over consumption and satisfaction with public good) than the

crowding-in effect is possible. One could explain this observation by findings from Brooks (2003)

who finds that under certain conditions (low levels of government grants) government grants can

crowd-in private contributions. Under low levels of provided public good it is to be expected that the

marginal utility for consumption and satisfaction with public good is declining slowly which could

explain the possibility of crowding-in effect observed here.

Q.E.D.

Proposition 4:

1) In the equilibrium the marginal utility from the use value component of users utilityfunctions is positive, while the marginal value of users non-use value component is

negative.

2) The relationship between non-use values of the user and non-user is ambiguous and has tobe determined empirically.

Because of (40) it has to hold:

2 + + 2 = + + + + = 065


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But the first component on the LHS of final equality is just the use value component of the marginal

utility from a one-unit increase in donations of the user and the second term is the respective non-usevalue component of this marginal utility. Because of assumption (8) it is obvious that the first term has

to be positive and the second negative.

This also shows that one cannot determine the difference in the level of non-use values contributionto the users utility and non-users utility from the model. From (49) and (65) one gets:

+ = + 2 > + 66

and therefore:

+ > 67

But from this consideration (and inequality (51)) one is not able to determine whether > or < . If it holds that > then the non-use value contribution to the donation of anindividual would be greater for the user than the non-user (by similar considerations as in the proof of

Proposition 1). If on the other hand it holds that < then the opposite would hold the non-use value contribution to the donation of an individual would be greater for the non-user than the user.

This shows that the exact relationship has to be determined on case-by-case basis.Q.E.D.

5) Data and hypothesesFor the empirical verification of our claims we will use data generated for contingent valuation studyof symposium Grosuplje - City of Sculptures in 2007. City of Sculptures is a project, which wasstarted by the Slovenian Sculpture Association and City Municipality of Grosuplje in 2004, with the

objective of bringing cultural identity to a small, suburban town. During seven years of its taking theproject acquired 24 new sculptures by international artists, and gained extremely positive feedback

from local public, while experts see in it a Slovenian role-model example of urban regeneration by artprojects.

The contingent valuation study done in 2007 estimated the individual willingness to pay 9.32 and

aggregate willingness to pay of 131,400.00 per year. It was estimated by Srakar (2012) that non-use

values account for approximately 67.5 % of the total value of the symposium which is in line withfindings from e.g. Bille Hansen (1997).

The dataset Srakar used was composed of ten main sets of variables:1) Interest and knowledge in the field of culture in general2) Attitudes towards culture3) Level of individuals participation in cultural activities4) Seeing of benefits that culture can bring to Grosuplje Municipality5) Attendance to cultural events in Grosuplje6) Recognition and opinion about the project Grosuplje City of Sculptures7) Interest and knowledge of sculptures in Grosuplje8) Previous active participation in the project City of Sculptures


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9) Socio-demographic data, particularly monthly income and level of education10)Length of living in Grosuplje

For our purpose we transformed those variables into several new ones:

- nonuse, a dummy variable which equals 1 if the person clearly expressed non-use values (e.g.value for future generations, being proud of the city, maintenance of cultural heritage,disinterested satisfaction over the project taking place) as reasons for contributing to the

symposium and equals 0 otherwise.

- user, a dummy variable which equals 1 if the person has either participated at the workshopsat the symposium (in which case he/she is obviously a user) or if he/she answered positively to

at least 5 of 7 questions on attending the cultural events in Grosuplje (in which case we

assume he/she is a regular user of cultural events**), and equals 0 otherwise.

- freerid, another dummy variable which equals 1 if the respondent expressed the positive oreven large valuation of the symposium (variable cenigmk) yet he/she has either not expressed

the positive willingness-to-pay for the event or he/she has expressed the extremely low

willingness-to-pay for the event (measured by one half of the sum initially offered to him if he

had a large positive valuation of symposium, and by one quarter of this sum if he had a

positive valuation of symposium) and equals 0 otherwise.

In this way we were able to get the proxies for evaluating the effect of presence of non-valuers to the

willingness-to-pay for the event and most of all to the extent of free-riding in provision of the event.

The variables from Srakars study we will use are:

- zanimanje level of interest in cultural activities (expressed on Likert scale from 1 to 5)-

delavnice dummy variable which equals 1 if the respondent or his close relatives hadparticipated at the sculpture workshops being part of the symposia, and equals 0 otherwise

- obisk level of attending cultural activities in Grosuplje; joined variable for 7 similarquestions asking for attending or not attending cultural event, expressed on scale of 0-14

- pozn level of knowledge of cultural sector in general; joined variable for 3 similar questionsasking for the knowledge of cultural sector in Europe, Slovenia and Grosuplje, expressed on

scale of 0-12

- att1-6 six variables consisting of responses to questions asking for respondents attitudestowards cultural sector, e.g. whether he thinks there exist other much more important activities

than cultural ones, whether he thinks culture in Grosuplje is well provided for, whethere he

thinks culture could be expressed in money terms, etc.; each variable is measured on Likertscale from 1-5

- udejst categorical variable asking for the level of activity of respondent in cultural activities(0 for not being active; 1 for being active on free-time basis; 2 for being active on professional

basis)

** Unfortunately we weren't able to separate users and non-users in any other more specific way. Number of participants at the workshops(who are obvious users of the event) is too small and it represents less than 10% of the sample, which was insufficient for validity of mostcalculations. Furthermore this group can hardly be accounted as the only users of the symposium. Even if Srakar (2008) had attempted toseparate the real users of symposium, the sculptures made at the symposium stand in the city so basically all the people in Grosuplje areusers of the symposium. Yet they mostly express non-use values as reasons for contributing to the event. In the manner used in the article

we are able to at least say who are mostly users of cultural events in Grosuplje (as this is a small town we expect very few specialization inattending only particular cultural events and expect that the users are people who are in general inclined to attending the cultural events)and who are the non-users. Yet of course this separation is potentially prone to a large arbitrariness bias.


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- korist a categorical variable accounting for different usages that respondent thinks culturehas for Grosuplje citizens; a joined variable for 6 similar questions, the joined variable beingexpressed on level 0-12

- pozngmkr categorical variable accounting for the knowledge of symposium itself- cenigmkr categorical variable accounting for the level of satisfaction with the symposium;

based on a question being asked to only those respondent that at least heard of the symposium(pozngmkr> 0)

- spol the usual demographic variable for gender of the respondent- star_let the usual demographic variable for age of the respondent- gosp number of people living in the respondents household- gosp_sam - number of people living in the respondents household with own incomes- zaposl employment status- izobr level of education attained- dohod monthly income-level category

From our original sample of 501 answers we excluded all those who hadnt answered to any of the

questions, those who werent included in answering the question on the valuation of symposium itself,

those who had ambiguous answers or incomplete answers to willingness-to-pay question and those

who were denoted by interviewer as possibly unreliable in answering the questions (the questionnaire

included two separate questions on this topic for interviewer herself at the end of questionnaire). After

this procedure we were left with 343 valid answers. After comparing the primary and filtered sample

we could find no significant deviations in the mean value of the most important variables, we can

therefore conclude that no significant selection bias exists for the filtered sample.

On the basis of previous considerations in this article we will test the following hypotheses:

H1: Extent of free riding is lower when only users are participating in provision of the event.

H2: There is statistically significant difference in willingness-to-pay of users and non-users. We

expect the users expressing higher willingness-to-pay.

H3: Warm-glow giving in the form of non-use values has a significant impact on willingness-to-pay.

This impact is more significant for the non-users than for the users.

Hypotheses 1 and 3 are logically related to the results of the model in section 3. Hypothesis 2 is related

to findings of Proposition 1 in section 4, and is also a logical expectation based on previous empirical

studies.


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6) Empirical resultsBelow we firstly provide some basic descriptive statistics for the variables in the set:

Variable Mean Median Minimum Maximum Std. Dev. C.V. Skewness Ex. kurtosis

zanimanje 2,48105 2,00000 0,000000 4,00000 0,840542 0,338785 0,0301484 -0,160167delavnice 0,119534 0,000000 0,000000 1,00000 0,324889 2,71798 2,34555 3,50162

obisk 2,64431 3,00000 0,000000 7,00000 1,82463 0,690018 0,172760 -0,791834

user 0,244898 0,000000 0,000000 1,00000 0,430655 1,75851 1,18645 -0,592342

pozn 6,64140 7,00000 0,000000 12,0000 2,03543 0,306475 -0,235049 0,00617368

att1 3,33819 4,00000 0,000000 4,00000 0,869849 0,260575 -1,40508 1,99504

att2 2,61808 3,00000 0,000000 5,00000 1,26001 0,481273 -0,491510 -0,634091

att3 2,44606 2,00000 0,000000 5,00000 1,00692 0,411651 -0,187768 -0,0324565

att4 1,60350 2,00000 0,000000 5,00000 1,30011 0,810794 0,323806 -0,787409

att5 3,01749 3,00000 0,000000 5,00000 1,04559 0,346510 -0,818768 -0,0565319

att6 2,27697 2,00000 0,000000 5,00000 1,09849 0,482437 0,125495 -0,0191446

udejst 0,390671 0,000000 0,000000 2,00000 0,523288 1,33946 0,813114 -0,572394korist 4,69971 5,00000 1,00000 6,00000 0,675533 0,143739 -1,66336 4,73691

pozngmkr 0,92711 1,00000 0,000000 2,00000 0,642496 0,69301 0,0662730 -0,586573

cenigmkr 1,88338 2,00000 0,000000 3,00000 0,867434 0,460573 -0,903679 0,371803

freerid 0,125364 0,000000 0,000000 1,00000 0,331615 2,64521 2,26276 3,12008

spol 0,740525 1,00000 0,000000 1,00000 0,438987 0,592805 -1,09742 -0,795674

star_let 46,9096 47,0000 17,0000 87,0000 15,3154 0,326488 -0,0856610 -0,775880

gosp 2,52187 3,00000 0,000000 8,00000 1,43839 0,570367 0,342867 0,145799

gospsam 1,31487 1,00000 0,000000 4,00000 0,901581 0,685681 0,706031 0,323075

zaposl 1,92420 0,000000 0,000000 6,00000 2,10682 1,09491 0,278486 -1,75725

izobr 1,25948 1,00000 0,000000 3,00000 0,639597 0,507828 -0,155552 -0,487962

dohod 2,49271 3,00000 0,000000 5,00000 1,20880 0,484935 -0,475298 -0,439956nonuse 0,396501 0,000000 0,000000 1,00000 0,489885 1,23552 0,423159 -1,82094

Table 1: Summary statistics for the full sample

To test the first hypothesis we evaluated the ordinary probit regression of variable freeridon otherregressors excluding obiskand delavnice which were used in determining the variable useras well as

excluding cenigmkr which was used in determining the variable freeriditself. We also excluded thevariables zaposl and izobr due to possible collinearity with dohod, gosp_sam due to possible

collinearity withgosp, and att2 (response to question Do only the cultural events you visit matter toyou?) due to possible collinearity with user.

The results of probit regression are in the below table:


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Model 1: Probit, using observations 1-343

Dependent variable: freerid

Coefficient Std. Error z p-value

Const -0,506648 0,804321 -0,6299 0,52876

zanimanje -0,123114 0,151519 -0,8125 0,41649

user -0,233095 0,1381467 -1,6873 0,09150 *

pozn -0,0849892 0,0548317 -1,5500 0,12114

att1 -0,111764 0,112183 -0,9963 0,31912

att3 0,142216 0,11674 1,2182 0,22314

att4 0,122886 0,0744774 1,6500 0,09895 *

att5 -0,0654121 0,0873611 -0,7488 0,45401

att6 -0,0359888 0,0993245 -0,3623 0,71710

udejst 0,0221375 0,221072 0,1001 0,92024

korist 0,112505 0,129517 0,8687 0,38504

pozngmkr -0,286779 0,171115 -1,6759 0,09375 *

spol 0,0379414 0,218815 0,1734 0,86234

star_let 0,00331561 0,00697637 0,4753 0,63460

gosp 0,0431052 0,0739895 0,5826 0,56017

dohod 0,0013301 0,0870652 0,0153 0,98781

nonuse -1,08505 0,230681 -4,7037


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The extent of free-riding in our model is furthermore determined by the answers to fourth attitudinal

question (Cultural activities can be quantified by money), which means that those people who aremore concerned about financial characteristics of cultural activities tend to free-ride more, which

seems logical. Extent of free-riding is also determined by the knowledge of cultural sector and

familiarity with Grosuplje symposium, which are both negatively signed meaning that people with

better knowledge of culture and more familiarity with symposium tend to free-ride less, which is againin accordance with expectations. Also, the people with larger non-use values (including the use

valuers) tend to free-ride less which is again in accordance with predictions of section 3.

We can therefore conclude that the empirical results fully support our hypothesis. The weak

relationship could perhaps also be contributed to artificial construction of some of the used variables

and usage of a secondary dataset, therefore to the insufficiency and possible bias of the instrument

itself. It would probably wise to include some other more accurate measure of free-riding which we

were unable to do until the sending of this article. Nevertheless we were able to find reasonable

support for our main hypothesis.

To test for our second hypothesis we performed a simple one-tailed t-test of difference of means

between the general sample and the sample including only users (respondents with the value of

variable userequal to 1). The mean value of willingness-to-pay for general sample is 11.02 while for

the sample with only users it was 15.31 . The difference is strongly statistically significant which

confirms the second hypothesis: the users have different (higher) willingness-to-pay than the non-

users. This supports the Proposition 1 and is of course a well known result from the empirical

contingent valuation studies.

One could also speculate that if the warm-glow component in the form of non-use values (variablenonuse) is such a statistically significant predictor of free-riding, why then do we observe statistically

significant difference in the willingness-to-pay between users and non-users? As predicted from

section 3 (and confirmed by empirical results) the inefficiency of equilibrium will be significantly

lowered in such case. As predicted from Proposition 1 this could also affect the difference in

willingness-to-pay between users and non-users.

This observation can be explained from the relatively high marginal utility from consumption of

public good for the users (which is an argument in Proposition 1). We proxy for the marginal utility

from consumption of public good by the level of satisfaction with the symposium (variable cenigmkr)

The importance of this marginal utility for the user is confirmed by correlation matrix of point bi-serialcorrelation of variables userand cenigmkr, which is moderately positive and statistically significant at

95%, which shows that users have statistically important valuation of public good consumption, which

could explain the reasons for the above observation.

corr(user, cenigmkr) = 0,13232677

Under the null hypothesis of no correlation:

t(341) = -2,46525, with two-tailed p-value 0,0142

Table 4: Correlation table point-biserial correlation between being users (user) and utility from public good consumption

(cenigmk)


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To test the third hypothesis we again used the sample including only users, which lowers our sample

to 83 observations. We used the tobit specification for regressing willingness-to pay (being of coursecensored from below by 0) to the similar set of regressors as was done for testing the first hypothesis

(of course excluding the variable user which is uniformly one for this sample). The results are

summarized in the below table:

Model 2: Tobit, using observations 1-83

Dependent variable: bidmax


Const -27,7957 28,1762 -0,9865 0,32389

zanimanje -1,18668 4,02155 -0,2951 0,76793

pozn -0,0710749 1,5 -0,0474 0,96221

att1 2,43934 3,12763 0,7799 0,43543

att3 -1,21963 2,30651 -0,5288 0,59696

att4 0,137333 2,15136 0,0638 0,94910

att5 0,343049 3,61229 0,0950 0,92434

att6 1,31979 1,92055 0,6872 0,49196udejst 2,24242 5,04145 0,4448 0,65647

korist -0,797103 4,53209 -0,1759 0,86039

pozngmkr 10,2628 5,74311 1,7870 0,07394 *

spol -2,02105 7,5377 -0,2681 0,78860

star_let -0,0175292 0,188639 -0,0929 0,92596

gosp 2,80014 1,44424 1,9388 0,05252 *

dohod 7,1075 2,45768 2,8920 0,00383 ***

nonuse 5,17853 5,28682 0,9795 0,32732

Chi-square(15) 26,27400 p-value 0,035239

Log-likelihood -315,3121 Akaike criterion 664,6242Schwarz criterion 705,7445 Hannan-Quinn 681,1440

sigma = 21,267 (2,84314) Test for normality of residual -

Null hypothesis: error is normally distributed

Left-censored observations: 15 Test statistic: Chi-square(2) = 37,7094

Right-censored observations: 0 with p-value = 6,47903e-009

Table 5: Results of the Tobit regression model for the reduced sample (only users)

The results show that non-use values are even not statistically significant at all for the users

willingness to pay. This shows that users have low extent of warm-glow giving and are most probablymotivated mostly by use values.

The difference to non-use valuers is clearly shown in the tobit regression results for the whole sample

(Table 6), which shows that by including the non-users in the sample, the coefficient for non-usevalues becomes strongly statistically significant and also higher than the coefficient in Table 5. This

confirms that non-use values are indeed a more significant predictor of the willingness-to-pay of non-users and therefore contribute significantly to efficiency of equilibrium, which was also observed from

the results in Table 1.


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Model 3: Tobit, using observations 1-343Dependent variable: bidmax


Const -37,306 10,3361 -3,6093 0,00031 ***

zanimanje 0,246774 1,67271 0,1475 0,88271

user 2,37317 2,4333 0,9753 0,32942

pozn 1,1037 0,676403 1,6317 0,10274

att1 2,08046 1,28616 1,6176 0,10575

att3 -0,923226 0,979868 -0,9422 0,34609

att4 0,0599383 0,909576 0,0659 0,94746

att5 0,374207 1,05394 0,3551 0,72255

att6 0,0621241 0,972147 0,0639 0,94905

udejst 1,04736 2,38271 0,4396 0,66025

korist 2,03758 1,49367 1,3641 0,17252

pozngmkr 2,91578 2,17049 1,3434 0,17915

spol 0,43565 2,83608 0,1536 0,87792

star_let -0,0302984 0,0860005 -0,3523 0,72461

gosp 0,951259 0,821756 1,1576 0,24703

dohod 4,61654 1,10116 4,1924 0,00003 ***

nonuse 9,77628 2,2946 4,2606 0,00002 ***

Chi-square(16) 61,64835 p-value 2,75e-07

Log-likelihood -1185,562 Akaike criterion 2407,124

Schwarz criterion 2476,204 Hannan-Quinn 2434,641

sigma = 19,6153 (1,83212) Test for normality of residual -

Null hypothesis: error is normally distributed

Left-censored observations: 87 Test statistic: Chi-square(2) = 141,149Right-censored observations: 0 with p-value = 2,23789e-031

Table 6: Results of the Tobit regression model for the whole sample

All three hypotheses have therefore been confirmed. Extent of free riding is indeed lower when only

users participate in the provision of the event. The weak statistical significance of this relationship canbe attributed to importance of warm-glow giving in the form of non-use values for the valuations of

the non-users as demonstrated in the difference of coefficients in tobit specification for the whole

sample (Table 6) and sample with only users (Table 5). This is in accordance with results from section

3 and confirms also the hypothesis 3. The hypothesis 2 which is in strong accordance with the knownempirical results from other studies (see: Pearce et al. 2002) has been confirmed as well.

As mentioned, one could of course speculate about the validity of our empirical results. Data from the

Grosuplje contingent valuation study, were not created for the purposes of our study and are therefore

a somewhat arbitrary choice. To measure the extent of free-riding and differences between users and

non-users we had to construct new variables whose validity can be debated. The theoretical results

from sections 3 and 4 therefore await a proper empirical validation.


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7) Discussion and conclusionIn the article we tried to observe the consequences of including non-use valuations of the donors for

the efficiency of private provision of non-excludable public good. As non-use values are a cause of

externalities and therefore free-riding one would expect that the presence of non-use values extends

the Pareto inefficiency of private provision of public good equilibrium which was observed previouslyby Samuelson and numerous other authors. Our theoretical model confirmed the inefficiency of

equilibrium and confirmed that in the presence of non-use values the inefficiency is extended. We

were able to achieve results that show that the equilibrium is more Pareto inefficient due to the

presence of non-use valuers and were also able to show that non-use values effect the efficiency in two

different directions, being accountable for both more efficient as well as more inefficient equilibrium

provision. Yet it has been proved that the inefficiency effect always predominates and that therefore

non-use values are an argument for public intervention into donations and similar mechanisms.

We were also able to show some important comparative statics results: donations of users will most

commonly be greater than donations of non-users; crowding-out effect will be always present in

equilibrium without warm-glow giving; in the presence of warm-glow giving even a crowding-in

effect can be possible; the extent of non-use values of users and non-users can not be uniformly

predicted for the model and this question has to be verified in an empirical manner.

These results have been tested by a short econometrical study using data from contingent valuation

study of Grosuplje international sculpture symposium. All of the hypotheses have been confirmed.

Yet we have to point to the possible biases in econometric results due to possible (probable)

inadequacy of the data for our research purposes. Most important findings from theoretical part would

therefore have to be evaluated and confirmed by future empirical studies.

Non-use values are an argument that has been left unexplored on a modeling level despite its role in

contingent valuation methodology which is today a predominant way to account for economic value of

a cultural event in cultural economics. They have never been properly modeled and their possibility as

an argument in advocacy for public support to the arts has been left unexplored as well (as noted by

Brooks 2006). This article is therefore meant as a start in exploring this argument rich in possibilities

and its relation to public support and public values of a cultural good. We show that due to the

presence of non-use values the private provision of public goods is prone to Pareto inefficiency

serving as a necessary argument for public support to provision of a certain good. This contribution

therefore brings reasons for public support to private mechanisms of cultural goods provision:donations, sponsorships, foundations, lotteries, crowd-funding. We are inclined to think that whenever

one is able to show the existence of non-use values of the contributors there are reasons to believe that

leaving the provision to the market itself will be Pareto inefficient and would need state intervention

either by grants or indirect subsidies. Yet the further scope of this argument is left to future research.

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