The Groves-Ledyard Mechanism: An Experimental Study of Institutional Design

The Groves-Ledyard mechanism theoretically can solve the \free-rider" problem in public good provision in certain environments. Two questions are of overriding importance in implementing the mechanism. The rst is related to the actual performance of the mechanism in general. The second is the choice of a \punishment parameter", , which is the only parameter that is available for those who may want to actually use the mechanism. Thus the determination of the role of this variable on mechanism performance is fundamental for any advances along the lines of actual implementation. In studying the Groves-Ledyard mechanism,we show that the punishment parameter, plays a crucial role in the performance of the mechanism. By using = 1 and 100, we show that under the higher punishment parameter, the Groves-Ledyard equilibrium is chosen much more frequently; a higher level of the public good is provided and e ciency is higher. By examining two behavioral models, we show that a higher leads to an increase in the probability of an individual choosing a best response predicted by the model. The parameter, alone explains nearly 70% of the data in both the Cournot and the Carlson-Auster behavioral model. We also found that We would like to thank John Ledyard for his many insightful discussions and suggestions, Dave Grether, Scott Page, Arthur \Skip" Lupia and an anonymous referee for their comments, and Hsing-Yang Lee for computer programming. Any remaining errors are our own. Email: [email protected], [email protected]. Department of Economics, The University of Michigan, Ann Arbor, MI 48109-1220 Division of the Humanities and Social Sciences, California Institute of Technology, Pasadena, CA 91125