Demand Revelation,Hypothetical Bias,and Threshold Public Goods Provision

We examine the issues of hypothetical bias, demand revelation, and gender differences in a threshold public goods experiment with heterogeneous induced-values. First, we find no evidence of hypothetical bias in our threshold provision public goods experiments, despite the fact this is an open-ended type mechanism. Our results support recent experimental findings that use induced-values to investigate hypothetical bias. Second, we investigate the demand revealing performance of real and hypothetical payments and find no evidence that real payment performs better than hypothetical payment in our experiments. Third, we examine whether payments, real and hypothetical, are positively related to induced-values. Our results suggest there is statistical evidence that payments are positively related to true values. Finally, we examine the effect of gender on real and hypothetical payments in our experiment. The results show that gender matters for contributions through both real and hypothetical payments, after controlling for true values as well as socio-economic variables. Results also indicate that females are more likely to truthfully reveal their value than males through hypothetical payments, but gender is not significant for truthfully revealing their value through real payments.     

Finitely Repeated Voluntary Provision of a Public Good

This paper theoretically explores the voluntary provision of a public good when either one of the following holds: (i) agents’ utility is the sum of their monetary earnings and a nonmaterial component, or (ii) agents’ exhibit satisficing behavior. We show that a small degree of either nonmaterial payoffs or satisficing behavior can generate large contributions in a finitely repeated game, even if the incentive to free‐ride on others’ contributions calls for negligible public good provision in the static game. The equilibrium is characterized by a sharp decline in contributions toward the end of the game. Several comparative results regarding group size and technology are consistent with laboratory data obtained in experimental studies. The model also predicts the restart effect observed in previous experiments.     

Assurance payments on the coordination of threshold public goods provision: An experimental investigation

We investigate the assurance payment mechanism (APM) in a single-unit threshold public good game. APM offers an assurance payment ($AP$) as compensation to would-be contributors if the group fails to provide the good and individual contributions reach a pre-determined price. We characterize the set of pure-strategy Nash equilibria for APM under complete information and show that assurance payments substantially reduce the multiplicity of equilibria and eliminate the set of non-provision equilibria in a general setup. We find strong evidence that APM improves upon the baseline provision point mechanism without assurance in lab experiments. Assurance payments act as a coordination device and induce more contributions concentrated on $AP$, especially for agents with values above $AP$, leading to more frequent successful provision, higher group contributions, and an overall welfare improvement. Our experimental findings highlight the non-equilibrium mis-coordination as the main reason for the non-provision of threshold public goods and indicate that the format of assurance payments plays a key role in successful coordination even when provision is the unique equilibrium outcome.     

Ambiguity and Public Good Provision in Large Societies

In this paper, we consider the effect of ambiguity on the private provision of public goods. Equilibrium is shown to exist and be unique. We examine how provision of the public good changes as the size of the population increases. We show that when there is uncertainty, there may be less free‐riding in large societies.     

A Field Experiment in Charitable Contribution: The Impact of Social Information on the Voluntary Provision of Public Goods

We study the effect of social information on the voluntary provision of public goods. Competing theories predict that others' contributions might be either substitutes or complements to one's own. We demonstrate a positive social information effect on individual contributions, supporting theories of complementarities. We find the most influential level of social information is drawn from the 90th to 95th percentile of previous contributions. We furthermore find the effect to be significant for new members but not for renewing members. In the most effective condition, social information increases contributions by 12% ($13). These increased contributions do not crowd out future contributions.     

Discrete public goods under threshold uncertainty

A discrete public good is provided when total contributions exceed the contribution threshold, yet the threshold is often not known with certainty. I show that the relationship between the degree of threshold uncertainty and equilibrium contributions and welfare is not monotonic. For a large class of threshold probability distributions, equilibrium contributions will be higher under increased uncertainty (e.g., a mean-preserving spread) if the public good's value is sufficiently high. Otherwise, and if another condition on the distribution's mode is met, contributions will be lower. The same result also obtains if a single-crossing condition of the pdfs is met.     

Threshold uncertainty in the private-information subscription game

We introduce threshold uncertainty, à la Nitzan and Romano (1990), into a private-values model of voluntary provision of a discrete public good. Players are allowed to make any level of contribution toward funding the good, which is provided if the cost threshold is reached. Otherwise, contributions are refunded. Conditions ensuring existence and uniqueness of a Bayesian equilibrium are established. Further restricting the threshold uncertainty to a uniform distribution, we show the equilibrium strategies are very simple, even allowing for any number of players with asymmetric distributions of values. Comparative statics with respect to changes in players' distributions are derived, allowing changes in both the intensity and the dispersion of values. For example, increased uncertainty, in the sense of mean-preserving spreads of players' distributions of values, increases equilibrium contributions. Finally, we show the equilibrium is interim incentive inefficient. The sharpness of our results greatly contrasts with the more qualified insights of earlier private-values models with known cost threshold, which relied on there being two symmetric players and generally exhibited multiple equilibria.     

Combining performance-based and action-based payments to provide environmental goods under uncertainty

Payments for environmental services (PES) are widely adopted to support the conservation of biodiversity and other environmental goods. Challenges that PES schemes have to tackle are (i) environmental uncertainty and (ii) information asymmetry between the provider of the service (typically a farmer) and the regulator. Environmental uncertainty calls for action-based payment schemes, because of the more favorable risk allocation if the farmer is risk-averse. Information asymmetry, on the other hand, calls for a performance-based payment, because of the more direct incentives for the farmer. Based on a principal-agent model, we study the optimal combination of both, performance-based and action-based payments under conditions of environmental uncertainty and asymmetric information. We find that for a risk-neutral regulator a combination is optimal in the majority of cases and that the welfare gain of the combined scheme over a pure action-based (performance-based) payment increases with information asymmetry (environmental uncertainty). We further show that for a regulator who is risk-averse against fluctuations in environmental goods provision the optimal performance-based payment is lower than for a risk-neutral regulator. We quantitatively illustrate our findings in a case study on the enhancement of the butterfly Scarce Large Blue (Maculinea teleius) in Landau/Germany.     

Information Provision in Procurement Auctions

We study the optimal provision of information in a procurement auction with horizontally differentiated goods. The buyer has private information about her preferred location on the product space and has access to a costless communication device. A seller who pays the entry cost may submit a bid comprising a location and a minimum price. We characterize the optimal information structure and show that the buyer prefers to attract only two bids. Further, additional sellers are inefficient since they reduce total and consumer surplus, gross of entry costs. We show that the buyer will not find it optimal to send public information to all sellers. On the other hand, she may profit from setting a minimum price and that a severe hold‐up problem arises if she lacks commitment to set up the rules of the auction ex ante.     

Private provision of discrete public goods

We investigate private provision of discrete public goods under refund and cost-sharing. If it is commonly believed that individuals may be warm-glow altruists and the group-size is a Poisson random variable, then the equilibrium distribution of collected contributions is uniquely determined. If composition uncertainty is very small and the expected group-size sufficiently large, the distribution of contributions can be described by concentrating in a symmetric mixed-strategy equilibrium. As the expected group-size increases, the probability a randomly selected player contributes and the associated expected number of contributions converge to the corresponding ones in the symmetric mixed-strategy equilibrium of the game with no uncertainty.     

Voluntary Provision of Public Goods and Technology

This paper highlights issues in the theory of voluntary provision of public goods, building on the investigation by Peacock in connection with the contributions by Coase and Buchanan. Our goal is twofold. We first draw attention to the early literature investigating the provision of public goods and to the successive theoretical analysis. We then focus on the impact of technology on supply and demand. Examples of different types of public goods are provided, with special attention to the cultural sector, to investigate whether and how technology affects the efficiency and the effectiveness of the related public goods provision. The implementation and exploitation of technological advancements are investigated in view of the role of different actors (public, private) at different levels of government.     

Heterogeneity and the Voluntary Provision of Public Goods

We investigate the effects of heterogeneity and incomplete information on aggregate contributions to a public good using the voluntary contribution mechanism. The non-linear laboratory environment has three-person groups as partners under varying conditions of information and communication. Bergstrom, Blum and Varian predict that increasing heterogeneity will have no effect on aggregate contributions in a no-communication environment. Ledyard conjectures a positive effect of incomplete information, a negative effect of heterogeneity, and a positive interaction of heterogeneity and incomplete information. We find that incomplete information has a small but significant negative effect. Heterogeneity has a positive effect on aggregate contributions, but its effects interact unexpectedly with communication. In a no-communication environment, heterogeneity in two dimensions (endowment and preferences) increases contributions substantially while heterogeneity in a single dimension (endowment or preferences) has little effect. In the communication environment we find the reverse. We also find a positive interaction between heterogeneity and incomplete information. Thus we reject the Bergstrom, Blume and Varian invariance result and provide mixed evidence on Ledyard's conjectures.     

Ambiguity on audits and cooperation in a public goods game

We investigate the impact of various audit schemes on the provision of public goods, when contributing less than the average of the other group members is centrally sanctioned and the probability of an audit is unknown. We study how individuals update their beliefs about the probability of being audited, both before and after audits are permanently withdrawn. We find that when individuals have initially experienced systematic audits, they decrease both their beliefs and their contributions almost immediately after audits are withdrawn. In contrast, when audits were initially less frequent and more irregular, they maintain high beliefs and continue cooperating long after audits have been withdrawn. This identifies the compliance effect of irregularity and uncertainty due to learning difficulties. By increasing both the frequency of audits and the severity of sanctions, we also identify an educative effect of frequent and high sanctions on further cooperation.     

Stock options and managerial optimal contracts

Summary. In this paper we are concerned with the performance of stock option contracts in the provision of managerial incentives. In our simple framework, we restrict the space of contracts available to the principal to those conformed by a fixed payment and a call option on the firms stock. As compared to the fixed payment and the option grant, we find that the strike price plays an intermediate role in the provision of insurance and incentives. We also develop some methods for the calibration of a standard principal-agent model based upon observed CEO earnings schedules and the volatility of the firms value in the stock market. These methods are useful to address some important issues such as the performance of stock option contracts, the degree of risk aversion compatible with current earnings profiles and the sensitivity of compensation to changes in firms characteristics.Received: 9 April 2003, Revised: 13 September 2004, JEL Classification Numbers: C6, D83. Correspondence to: Manuel S. SantosWe have benefitted from helpful discussions with Marco Celentani, Hector Chade, Alejandro Manelli and Ed Schlee. We are especially grateful to an anonymous referee for very detailed comments.     

Collective Choice and Voluntary Provision of Public Goods*

Some public goods are provided entirely with private contributions, others with a mixture of public and private funding, and still others are entirely publicly funded. In order to study this variation, a model of dual provision is developed that endogenizes public and private funding. Households vote over an income tax that finances public supply of the good and on whether to permit private contributions. While permitting private contributions may lead to a reduction in total provision, a majority always favors permitting private contributions. Results are developed for small and large economies, and the relevance of nonexcludability and noncongestion are investigated.     

Contingent valuation with heterogeneous reasons for uncertainty

We test the hypothesis that respondents stating divergent reasons for choice uncertainty differ in their probability to vote yes in a CV setting. We introduce the use of a follow-up question used to classify uncertain respondents according to reason for uncertainty. Results indicate that respondents whose uncertainty derived from concerns about unforeseen negative impacts associated with provision of the good were more likely to vote yes, and depending on the model, that the probability of a yes vote of these respondents was consistently different than that of respondents whose uncertainty derived from concern about cost of provision or expected benefits.     

Economic Integration and Public Provision of Education

This paper develops a model of fiscal competition in public provision of a private good: education. In this framework, the welfare enhancing effects of public education provision are shown to be reduced by increased student mobility when, like in the EU, countries are unable to set differentiated fees to foreign students. Indeed, the threat of attraction of foreigners who free-ride on the national education system may induce suboptimal levels of public education provision when (price) discrimination is forbidden. Alternatively, countries may try to escape regulation and avoid equal treatment of foreign students. The paper provides some empirical evidence of the existence of a fiscal externality in education at the EU level.     

Endogenous Move Structure and Voluntary Provision of Public Goods: Theory and Experiment

In this paper, we examine voluntary contributions to a public good, embedding Varian's (1994) voluntary contribution game in extended games that allow players to choose the timing of their contributions. We show that predicted outcomes are sensitive to the structure of the extended game, and also to the extent to which players care about payoff inequalities. We then report a laboratory experiment based on these extended games. We find that behavior is similar in the two extended games: subjects avoid the detrimental move order of Varian's model, where a person with a high value of the public good commits to a low contribution, and instead players tend to delay contributions. These results suggest that commitment opportunities may be less damaging to public good provision than previously thought.     

Inefficient Public Provision in a Repeated Elections Model

We consider a dynamic setting with no policy commitment. Two parties that compete for election must choose the level of provision of a public good as well as the tax payment needed to finance it. The cost of producing the good may be high or low and this information is not known to the voters. We show that there exists an equilibrium in which the party that does not want much of the public good uses the inefficient (high cost) technology even though the efficient one is available. Using the low cost technology would, by informing the voters about the cost parameter, force it to produce an excessively high level of the good in the future. Interestingly, this equilibrium is not symmetric, suggesting that a party with a strong taste for the public good is less likely to adopt a wasteful policy.     

The effects of abandonment options on operating leverage and forward hedging

This paper examines the behavior of the competitive firm under output price uncertainty when the firm is endowed with an abandonment option and has access to a forward market for its output. When the realized output price is less than its marginal cost, the firm optimally exercises its abandonment option and ceases production. The firm lets its abandonment option extinguish, thereby producing up to its capacity, only when the realized output price exceeds its marginal cost. The ex post exercising of the abandonment option as such convexifies the firm's ex ante profit with respect to the random output price. We show that neither the separation theorem nor the full-hedging theorem holds in the presence of the abandonment option. The firm under-hedges its output price risk exposure in the forward market wherein the forward price contains a nonpositive risk premium. When the set of hedging instruments is expanded to include options, we show that both the separation and full-hedging theorems are restored. We further show that the firm prefers options to forwards for hedging purposes when both types of contracts are fairly priced.