Augmented serial rules for an excludable public good

Summary. We present a new class of rules named augmented serial rules for the provision of an excludable public good. First, we characterize this class by the four axioms of strategy-proofness, envy-freeness, access independence, and nonbossiness. Second, we identify two important subclasses by imposing an additional axiom: (i) anonymous augmented serial rules by anonymity, and (ii) Moulins serial rule by individual rationality.Received: 31 December 2002, Revised: 9 June 2004, JEL Classification Numbers: D71, D82, H41.This paper is a substantial revision of Serial cost sharing with simple games. I would like to thank Hervé Moulin, Yoshikatsu Tatamitani, an associate editor, and three anonymous referees for helpful suggestions and detailed comments. This research was partially supported by the Ministry of Education, Culture, Sports, Science, and Technology in Japan (Grant-in-Aid for 21st Century COE Program Microstructure and Mechanism Design in Financial Markets).     

The production and cost-sharing of an excludable public good

Summary We study a model of negotiation and coalition formation concerning a public expenditure and its financing. The agents must determine which coalition will jointly produce a public good, how much will be produced, and how the cost is to be shared. Agents that do not belong to the final coalition are excluded from consumption of the public good. Subgame-perfect Nash equilibria in stationary strategies lead to the formation of the grand coalition with an agreed alternative in the core of the economy. Conversely, for each alternative in the core, there exists a subgame-perfect Nash equilibrium in (pure) stationary strategies that leads to the formation of the grand coalition with that alternative.I wish to thank Dieter Balkenborg, Georg Noldeke, Shlomo Weber and Eyal Winter for helpful discussions. The comments of an anonymous referee greatly improved the quality of the exposition. Financial support from Deutsche Forschungsgemeinschaft, SFB 303, is gratefully acknowledged.     

Revealing demand for an actual public good

In spite of important theoretical advances and a number of laboratory tests in recent years, no practicable mechanism for revealing demand for public goods has yet emerged. A method is presented which seems capable of meeting the political demands of such mechanisms. It was successfully tested on an actual public-good project provided by the Swedish government. The method is evaluated against the background of the results of this nonlaboratory and nonhypothetical test.     

An experimental comparison of collective choice procedures for excludable public goods

This paper compares three collective choice procedures for the provision of excludable public goods under incomplete information. One, serial cost sharing (SCS), is budget balanced, individually rational, anonymous and strategy proof. The other two are “hybrid” procedures: voluntary cost sharing with proportional rebates (PCS) and with no rebates (NR). PCS satisfies all these properties except strategy proofness, and NR satisfies all the properties except for strategy proofness and budget balance. However, PCS and NR do not exclude any potential users, and they do not require equal cost shares, thereby overcoming the two main sources of inefficiency with SCS. We characterize the Bayesian Nash equilibria (BNE) of the hybrid mechanisms and conduct laboratory experiments to compare the performance of the three mechanisms. We find that PCS produces significantly more efficient allocations than either SCS or NR.     

The design of transnational public good mechanisms for developing countries

We analyze the design of incentive mechanisms for the provision of transnational public goods under asymmetric information. Transnational public goods are infrastructures that no single country can afford to build for itself. We show that the external constraints imposed by this mechanism may affect consumption, pricing and the true redistributive concerns of local governments. We characterize the corresponding distortions. We also discuss the impact of the preferences for redistribution of the international agency in charge of designing the mechanism and the role of its ability to enforce that mechanism.     

Serial cost sharing of excludable public goods: general cost functions

Summary. A group of individuals meet to share the cost and determine output allocations of a partial-excludable public good. We demonstrate that, for general cost functions and preferences that satisfy the Spence-Mirlees sorting condition, the serial cost-sharing formula (Moulin, 1994) has remarkable incentive properties. First, a direct economic mechanism that uses the serial formula is coalition strategy-proof, envy-free and satisfies the stand-alone property. Second, the serial mechanism involves partial exclusion, which is important for the reduction of the free-rider problem. Received: June 10, 1996; revised version; February 11, 1997     

Coming and going: Experiments on endogenous group sizes for excludable public goods

When a public good is congestible, individuals wanting to provide the public good face challenges in forming groups of optimal size, selecting the members of the group, and encouraging members to contribute for the public good. We conduct a series of experiments in which subjects form groups using three different entry and exit rules. The experimental results are analyzed in terms of group size, the level of public good provision, social efficiency, congestion and group stability. We find that entry restriction improves the average earnings for some individuals compared to free entry/exit or restricted exit. For a given group size, individuals under the restricted entry rule contribute more for the provision of the collective good. Also, for a given average contribution level of group members, subjects under the restricted entry rule suffer less from the congestion problem and are better able to form groups of sizes closer to the optimal.     

A utilitarian approach to the provision and pricing of excludable public goods

This paper studies utilitarian welfare maximization in a large economy with an excludable public good where individual preferences are private information. If inequality aversion is large, optimal allocations involve the use of admission fees and exclusion to redistribute resources from people who benefit a lot from the public good to people who benefit little. If inequality aversion is close to zero, optimal admission fees are zero. Because of inequality aversion, information rents of people who benefit a lot from the public good receive less weight, so optimal provision levels for the public good are below first-best levels.     

When the public good conflicts with an apparent preference for unsustainable behaviour

The example of peatlands is used to demonstrate the challenges facing the sustainable management of natural resources in situations where the fragility of an environment is not appreciated by all stakeholders. We reveal, through the use of a survey applying both contingent valuation and discrete choice experiments, that many local people and others within the wider population, value peatlands as an example of a cultural landscape. However, there is a reluctance to stop extracting peat for domestic fuel even though the activity is undermining the ecological sustainability of this same landscape. This resistance is shown to arise because the cutting of peat is a well-established land use and a cessation of peat cutting is perceived to require the abandonment of traditional rights. In addition, the activity is widely regarded as more benign than industrial scale cutting for energy. The value attached to the landscape is an opportunity for conservation policy, but for this to succeed there must be an acknowledgement of local interests.     

Democratic public good provision

This paper analyzes an overlapping generation model of redistribution and public good provision under repeated voting. Expenditures are financed through age-dependent taxation that distorts human capital investment. Taxes redistribute income both across skill groups and across generations. We focus on politico-economic Markov equilibria and contrast these with the Ramsey allocation under commitment. The model features indeterminate equilibria, with a key role of forward-looking strategic voting. Due to the lack of commitment to future policies, the tax burden may be on the wrong side of the dynamic Laffer curve. Moreover, restrictions on government policies can in some cases be welfare improving.     

Social capital as a public good and an oscillatory behaviour

In this study, we investigate optimal dynamics in a two-sector model in which the capital good is a public good. We obtain a sufficient condition under which optimal dynamics in fact follows non-linear dynamics, involving period-2 cycles and a tentshaped transition function.     

The provision and pricing of excludable public goods: Ramsey–Boiteux pricing versus bundling

This paper studies the relation between Bayesian mechanism design and the Ramsey–Boiteux approach to the provision and pricing of excludable public goods. For a large economy with private information about individual preferences, the two approaches are shown to be equivalent if and only if, in addition to incentive compatibility and participation constraints, the final allocation of private-good consumption and admission tickets to public goods satisfies a condition of renegotiation proofness. Without this condition, a mechanism involving mixed bundling, i.e. combination tickets at a discount, is superior.     

The minimum approval mechanism implements the efficient public good allocation theoretically and experimentally

We propose the minimum approval mechanism (MAM) for a standard linear public good environment with two players. Players simultaneously and privately choose their contributions to the public good in the first stage. In the second stage, they simultaneously decide whether to approve the otherʼs choice. Both contribute what they choose in the first stage if both players approve; otherwise, both contribute the minimum of the two choices in the first stage. The MAM implements the Pareto-efficient allocation in multiple solution concepts including backward elimination of weakly dominated strategies (BEWDS), limit logit agent quantal response equilibrium, subgame perfect minimax regret equilibrium, level-k thinking, and diagonalization heuristics. Moreover, the MAM is unique under plausible conditions. Overall, contributions in the MAM experiment averaged 94.9%. Quantifying subjectsʼ responses to the questionnaire reveal heterogeneous reasoning processes and highlight the importance of developing mechanisms that implement the desired social choice outcome in multiple solution concepts.     

Communication,competition and social gift exchange in an auction for public good provision

Reverse auctions are an established policy instrument for allocating conservation contracts. While the auction mechanism has been the subject of a number of studies, less attention has been paid to the post-bidding contract phase. As contracts involving natural resource management are usually incomplete, trust becomes crucial for the effectiveness of the programme. We test the effect of communication between auctioneer and bidders on bidding behaviour and contract fulfilment using experimental economics. We combine a repeated reverse auction with an effort-level game and use a bilateral chatting tool as treatment variable. Without communication, auctioneers tended to select the lowest-priced bidders, who invested substantially less than the socially optimal level of effort when fulfilling their contract to provide the public good. Relational contracting proved important, with effort levels and profits tending to be higher when auctioneers and bidders entered into consecutive contract relationships. In the communication treatment there was no evidence of price competition, as auctioneers were more likely to accept high-priced bids. However, an overall higher price level did not lead to efficiency losses, since contractors realised higher effort levels in return, establishing a ‘social gift exchange’. Our results demonstrate the importance of trust-based relationships between the auctioneering institution and landholders.     

Seigniorage and public good in an OLG model with cash-in-advance constraints

This paper is a contribution to the theory of the optimal monetary policy in overlapping generations models with a cash-in-advance constraint applying on old age consumption purchases. We are particularly interested in the study of seigniorage when the latter is used to finance public goods valued by consumers. Assuming that a public good enters the utility function and the existence of cash-in-advance constraints, we find a Laffer curve of seigniorage at steady-state. We also analyze the dynamic optimal monetary policy when the government maximizes an intertemporal social welfare function and can only resort to seigniorage to finance the purchases of the public good. We show that the optimal rate of money growth may be strictly higher than the one which maximizes steady-state seigniorage: the optimal amount of seigniorage may lie on the decreasing part of the Laffer curve of seigniorage. We finally suppose that the government can use lump-sum taxes in addition to seigniorage. Then, the Friedman rule prevails and public expenditures are only financed through lump-sum taxes.     

Learning dynamics for mechanism design: An experimental comparison of public goods mechanisms

In a repeated-interaction public goods economy, incomplete information and dynamic behavior may affect the realized outcomes of mechanisms known to be efficient in a complete information one-shot game. An experimental test of five public goods mechanisms indicates that subjects with private information appear to best respond to recent observations. This provides predictions about which mechanisms will generate convergence to their efficient equilibrium allocations. These predictions match the experimental result that globally stable efficient mechanisms realize the highest efficiency in practice. The simplicity of the suggested best response model makes it useful in predicting stability of mechanisms not yet tested.     

Optimal democratic mechanisms for taxation and public good provision

We study the interdependence of optimal tax and expenditure policies. An optimal policy requires that information on preferences is made available. We first study this problem from a general mechanism design perspective and show that efficiency is possible only if the individuals who decide on public good provision face an own incentive scheme that differs from the tax system. We then study democratic mechanisms with the property that tax payers vote over public goods. Under such a mechanism, efficiency cannot be reached and welfare from public good provision declines as the inequality between rich and poor individuals increases.