Controlling Human Utilization of Failure-Prone Systems via Taxes

TL;DR

This paper models how taxation influences individual usage of failure-prone systems with behavioral risk preferences, revealing complex effects like increased utilization under taxes and the benefits of differentiated tax rates.

Contribution

It introduces a game-theoretic framework incorporating prospect theory to analyze taxation effects on resource utilization, highlighting counter-intuitive outcomes and optimal tax strategies.

Findings

Heterogeneous prospect-theoretic preferences can lead to increased utilization under taxes.

Existence of conditions where utilization is monotone and continuous with respect to tax rates.

Differentiated tax rates can result in higher resource utilization than uniform taxes.

Abstract

We consider a game-theoretic model where individuals compete over a shared failure-prone system or resource. We investigate the effectiveness of a taxation mechanism in controlling the utilization of the resource at the Nash equilibrium when the decision-makers have behavioral risk preferences, captured by prospect theory. We first observe that heterogeneous prospect-theoretic risk preferences can lead to counter-intuitive outcomes. In particular, for resources that exhibit network effects, utilization can increase under taxation and there may not exist a tax rate that achieves the socially optimal level of utilization. We identify conditions under which utilization is monotone and continuous, and then characterize the range of utilizations that can be achieved by a suitable choice of tax rate. We further show that resource utilization is higher when players are charged differentiated tax rates compared to the case when all players are charged an identical tax rate, under suitable assumptions.