Public Goods Agreements with Other‐regarding Preferences

Stimulation of cooperation when noncooperation appears to be individually rational has been an issue in economics for at least a half century. In the 1960's and 1970's the context was cooperation in the prisoner's dilemma game; in the 1980's voluntary provision of public goods; in the 1990's, the literature on coalition formation for public goods provision emerged, in the context of coalitions to provide transboundary pollution abatement. The problem is that theory suggests fairly low (even zero) levels of contributions to the public good. Experiments and empirical evidence suggests higher levels of cooperation. This is a major reason for the emergence in the 1990's and more recently of the literature on other‐regarding preferences (also known as social preferences). Such preferences tend to expand cooperation (though not always). This paper contributes to the literature on coalitions, public good provision and other‐regarding preferences. For standard preferences, the marginal per capita return (MPCR) to investing in the public good must be greater than one for contributing to be individually rational. We find that Charness‐Rabin preferences tend to reduce this threshold for individual contributions. We also find that Charness‐Rabin preferences reduce the equilibrium size of a coalition of agents formed to provide the public good. In addition to theoretical results, some experimental implications of the theoretical model are provided. In contrast to much of the literature, we treat the wealth of agents as heterogeneous.