The Free Rider Problem : a Dynamic Analysis

We study the Markov equilibria of a model of free riding in which  infinitely lived agents choose between private consumption and contributions to a durable public good. We consider economies with reversibility, where investments can be positive or negative; and economies with irreversibility, where investments are non-negative and the public good can only be reduced by depreciation. With reversibility, there is a continuum of equilibrium steady states: the highest equilibrium steady state of  is increasing in , and the lowest is decreasing. With irreversibility, the set of equilibrium steady states converges to a unique point as depreciation converges to zero: the highest steady state possible with reversibility. In both cases, the highest steady state converges to the efficient steady state as agents become increasingly patient. Marco Battaglini Department of Economics Princeton University Princeton NJ 08544 [email protected] Salvatore Nunnari Division of the Humanities and Social Sciences, California Institute of Technology, Pasadena, CA 91125. [email protected]. Thomas Palfrey Division of the Humanities and Social Sciences, California Institute of Technology, Pasadena, CA 91125. [email protected] ∗Battaglini gratefully acknowledges financial support from the Alfred P. Sloan Foundation. Palfrey gratefully acknowledges financial support from NSF (SES-0962802). We are grateful to seminar participants at the Einaudi Institute for Economics and Finance, London School of Economics, Ohio State, Princeton, Toulouse, Yale and at the 2012 Southwest Economic Theory Conference for helpful comments. Juan Ortner provided excellent research assistance.