A Simple Mechanism for the Efficient Provision of Public Goods: Experimental Ev

Free-riding incentives are a pervasive phenomenon of social life. In case of private provisions of public goods, free-riding leads to inefficient underprovision. Economic theory explains this by viewing contributions to a public good as strategies in a noncooperative game (Theodore C. Bergstrom et al., 1986; Richard C. Cornes and Todd Sandler, 1986). Experimental evidence suggests that subjects are sometimes more cooperative than predicted by economic theory (Robyn M. Dawes and Richard H. Thaler, 1988; Douglas D. Davis and Charles A. Holt, 1993; John O. Ledyard, 1995). Yet, the same evidence shows that underprovision of the public good relative to the efficient level of contributions is also pervasive. This holds true for one-shot interactions as well as in case of repeated interactions. The tendency to underprovide is particularly strong towards the end of a finite number of repetitions of a voluntary contribution game (R. Mark Isaac et al., 1984; Ledyard, 1995). Economic theorists have reacted to the freeriding problem by designing sophisticated mechanisms for the implementation of an efficient allocation of public goods (e.g., Edward H. Clarke, 1971; Theodore Groves, 1973; Groves and Ledyard, 1977; Jerry R. Green and Jean-Jacques Laffont, 1979; for a survey, see Laffont, 1987). This literature has greatly increased our knowledge about the incentivecompatibility requirements for the Paretooptimal provision of public goods. However, as has been pointed out by the proponents of this literature, the proposed mechanisms are frequently rather complicated and, hence, difficult to implement. In his survey on “Incentives and the Allocation of Public Goods,” Laffont (1987 p. 567) writes, for example: “(...) any real application will be made with methods which are crude approximations to the mechanisms obtained here (...) considerations such as simplicity and stability to encourage trust, goodwill and cooperation, will have to be taken into account.” Recently, several authors have proposed incentive mechanisms which induce efficient contributions to the public good and seem to meet the requirements of simplicity. Varian (1994a), for example, examined a simple two-stage game in which agents have the opportunity to subsidize the other agents’ contributions. This mechanism relies on the concept of subgame perfection. Earlier, Mark Bagnoli and Bart Lipman (1989) have presented an attractively simple sequential voluntary contribution game that implements the core of the economy. However, the implementation requires a rather * Falkinger: Department of Economics, University of Regensburg, D-93040 Regensburg, Germany (e-mail: josef. [email protected]); Fehr and Gächter: Institute for Empirical Research in Economics, University of Zurich, Blümlisalpstrasse 10, CH-8006 Zurich, Switzerland (e-mail: [email protected];[email protected]);WinterEbmer: Department of Economics, University of Linz, Altenberger Strasse 69, A-4040 Linz, Austria, and Centre for Economic Policy Research (London) (e-mail: r.winterebmer@ jk.uni-linz.ac.at). Financial support from the Swiss National Science Foundation (Project Number 12-43590.95) is gratefully acknowledged. We also would like to thank two anonymous referees for their helpful comments. Comments by James Andreoni, Axel Ockenfels, by seminar participants at the University of California-Berkeley, the University of Dortmund, the University of Frankfurt, the Massachusetts Institute of Technology, the University of Regensburg, the University of Zurich, at the Workshop for Experimental Economics at Rauischholzhausen, and at the European Economic Association Meeting in Prague, the ESA Meeting in Houston, the ASSA Meeting in San Francisco, and at the Meeting of the Verein für Socialpolitik in Rostock are also gratefully acknowledged. Valuable research assistance has been provided by Katja Cavalleri and Beatrice Zanella. We are particularly grateful to Urs Fischbacher for writing the computer program. 1 Varian (1994b) generalizes the mechanism to other economic environments involving externalities. Joel M. Guttman (1978, 1987) and Leif Danzinger and Adi Schnytzer (1991) consider a similar game in which individuals choose subsidy rates in the first stage and decide in the second stage about their contributions to the public good, given the subsidy rates chosen in the first stage. A critical assessment of their analysis is provided by Wilhelm Althammer and Wolfgang Buchholz (1993).