Optimal ownership of public goods reconsidered

Consider a non-governmental organization (NGO) that can invest in a public good. Should the government or the NGO own the public project? In an incomplete contracting framework with split-the-difference bargaining, Besley and Ghatak (2001) argue that the party who values the public good most should be the owner. We demonstrate the robustness of their insight when the split-the-difference rule is replaced by the deal-me-out solution. Our finding is in contrast to the private good results of Chiu (1998) and De Meza and Lockwood (1998), who show that the optimal ownership structure crucially depends on whether the split-the-difference rule or the deal-me-out solution is used.     

Social security, public education and the growth-inequality relationship

We study how the relationship between economic growth and inequality depends upon the levels of funding of two of the largest government programs, public education and social security. We do this in the context of an overlapping generations economy with heterogeneous agents where the government collects a tax on labor income to finance these programs. We show that in our model an increase in government spending on social security reduces income inequality and can have a non-monotonic effect on growth. When the initial level of social security funding is low, as is the case in most poor economies, then its increase will enhance growth. When its funding level is high as is typical for developed countries, we show that its further increase can slow down growth while reducing income inequality. These results obtain regardless of whether the increase in social security funding is financed by a tax increase or by cutting the public education budget. We also find that the effects of increasing the level of public education expenditures or the overall size of the government budget (holding the budget composition fixed) are characterized by similar non-monotonic growth-inequality relationships.     

Credible assignments can improve efficiency in laboratory public goods games

This paper reports an experiment investigating how assignments improve economic efficiency in a modified version of the standard voluntary-contributions mechanism. The experiment uses a non-binding message that makes common information assignments in the repeated game. A credible assignment is one actually followed by the participants. It turns out to be difficult to credibly assign the symmetric efficient outcome in four person cohorts, but we did discover one assignment that was credible in the last match of the evolutionary repeated game.     

Infrastructure privatization and changes in corruption patterns: The roots of public discontent

This paper offers a theory of how the degree of corruption that prevails in a society responds to changes in the ownership structure of major public service providers. We show that there are cases in which privatization, even though it fosters investments in infrastructure, also opens the door to more corruption. The public dissatisfaction towards privatization is then crucially affected by the changes in the degree and pattern of corruption. Our model thus helps understand the seemingly paradoxical situation prevailing in Latin America, where most studies find that privatizations have been efficiency-enhancing and have fostered investments and, at the same time, popular dissatisfaction with the process is extremely high, especially among the middle class. We show that this line of explanation is consistent with the evidence from surveys in the region.     

Endogenizing market institutions: An experimental approach

We study experimental two-sided markets in which the information structure is endogenous. When submitting an offer, a trader decides which other traders will be informed about the offer. This setup allows both a decentralized bargaining market (Chamberlin, J. Polit. Econ. 56 (1948) 95), and a double auction market (Smith J. Polit. Econ. 70 (1962) 111) as special cases. The results show that offers are typically directed to all traders of the other side of the market, but to none of the traders of the same side of the market. Even though traders receive much less information, the resulting market institution leads to the same outcomes in terms of prices and efficiency as a double auction market. In two additional treatments we examine the robustness of these results. First, it is found that the market institution adapts predictably, but not necessarily efficiently, to the imposition of transaction costs. Second, we find that the preference of sellers to conceal offers from competitors is strict. At the same time, sellers benefit collectively when they reveal offers to each other.     

Unions, government's preference, and privatization

By introducing the government's preference for tax revenues into the theoretical framework of unionized mixed oligopolies, this study investigates the efficiency of privatization. The results are twofold. First, regardless of the government's preference for tax revenues and the number of private firms, the government and the public firm do not always have an incentive to privatize the public firm even if the government places lesser emphasis on the tax revenues than on social welfare. Second, social welfare increases with an increased number of private firms regardless of the government's preference for tax revenues and decreases with the government's preference for tax revenues regardless of the number of private firms. Hence, the government can use tax more efficiently as a commitment device to control the union's wage demand so as to maintain lower wage level under unionized mixed oligopoly.     

Location and ownership of public goods

We introduce location choice for the public good in the property rights framework. We find that it can be optimal to separate location from ownership.     

Privatisation of utilities and the asset value problem

Privatised utilities are typically characterised by both undervaluation and underpricing. When faced with this problem, regulators have tended to employ a market-value approach to determine the regulatory asset base. This paper analyses this approach and shows that it magnifies the impact of any ‘short-lived’ error at privatisation and has the effect of entrenching relative errors forever. We then address the question whether there is an alternative mechanism that can accommodate the undervaluation problem but does not fall foul of the difficulties inherent in the market-value approach. The alternative we suggest is to use the regulatory agency's own estimate of the company's value, which we call the model-based asset value. It is shown that errors made at the time of privatisation do not have the same impact on future prices, and hence far less effect on the potential sale price.     

Destructive behavior in a Fragile Public Good game

Socially destructive behavior in a public good environment–like damaging public goods–is an underexposed phenomenon in economics. In an experiment we investigate whether such behavior can be influenced by the very nature of an environment. To that purpose we use a Fragile Public Good (FPG) game which puts the opportunity for destructive behavior (taking) on a level playing field with constructive behavior (contributing). We find substantial evidence of destructive decisions, sometimes leading to sour relationships characterized by persistent hurtful behavior. While positive framing induces fewer destructive decisions, shifting the selfish Nash towards minimal taking doubles its share to more than 20%.     

Can experimental measures of sensitivity to social pressure predict public good contribution?

Public good contributions may be affected by the social demand to contribute that is implicit in them. Sensitivity to social pressure predicts behavior in paired dictator and money burning games; the evidence for effects on public good contribution is mixed.     

Nonprofits and public good provision: A contest based on compromises

Two competing nonprofits with ideologically distinct missions compete for donor funding to provide an indivisible public good in a population with heterogeneous preferences. This paper examines the extent to which (average) public values are undermined and nonprofits’ ideology compromised in a contractual game in which the right to provide the public good is the outcome of competition between nonprofits. We also scrutinize the roles of (i) cooperative versus competitive contracting, (ii) multiple public goods, (iii) enforceability of actions and (iv) observability of nonprofit costs in determining the equilibrium terms of the contract. In each case, the intensity of the ideological divide between the donor and the nonprofits jointly impact the degree to which compromises are made in terms of both the public's and nonprofit's missions, and the ability on the part of the donor to reap double (cost-saving and strategic) financial gains.     

Decentralizing development: Allocating public goods via competition

Decentralizing the allocation of public goods by giving funds directly to communities takes advantage of local information concerning needs, but leaves funds open to misuse or capture by local elites. A large scale development project in Indonesia attempts to overcome this downside of decentralized allocation by having communities compete locally for block grants. Competition weeds out less efficient projects. Increasing the number of villages bidding by 10% leads to a 1.8% decline in road construction costs. Increased community participation in project planning also leads to better outcomes.     

Simultaneous entry and welfare

I examine the welfare properties of free entry under conditions of simultaneous entry. Specifically, I consider the second-best problem of influencing the number of entrants while taking as given firm behavior upon entry. I consider two alternative models of simultaneous entry: grab-the-dollar entry and war-of-attrition entry. I show that, if entry costs are low, then the results from previous models of sequential entry are fairly robust to the possibility of simultaneous entry. If however entry costs are high, then the welfare effects of free entry depend delicately on the nature of the entry game being played.     

Optimal degree of privatization and the environmental problem

We determine the optimal degree of privatization in a mixed duopoly when the environmental problem exists. With regard to the ownership of the private firms, we analyze two cases: (h) the private firm is owned by domestic private investors and (f) it is owned by foreign private investors. A comparison of the two cases presents the following results. Partial privatization is always desirable in (h), and the optimal degree of privatization is independent of the degree of environmental damage. However, in (f), whether partial privatization is desirable or not depends on the degree of environmental damage: there are cases where full privatization or full nationalization is optimal.     

Penalties and the deterrence of unlawful collusion

This paper investigates the size of penalties required to deter cartel formation. Allowing the penalty to be increasing in duration within the infinitely repeated game framework, penalties do not need to be as severe as previous research would suggest.     

Price rigidities and institutional variations in markets with posted prices

Summary Standard laboratory posted-offer markets respond slowly and incompletely to demand shocks. In these one-sided markets, where sellers control the setting of prices, very little information is transmitted via the process of exchange. For this reason, traders have trouble distinguishing randomness in their own experience from changes in market fundamentals. This paper reports the results of twelve laboratory markets conducted to assess whether some common variants to standard posted-offer rules can correct the adjustment deficiences. Although discounting, multiple postings and excess demand information all improve performance, we find that response remains poor, and efficiencies low.Support for this research was provided by the National Science Foundation (SBR 9319842 and SBR 9320044), and the University of Virginia Bankard Fund. Data are archived at FTP address: fido.econlab.arizona.edu. We wish to thank Charles Plott and Shyam Sunder for useful comments on an earlier draft of this paper. The usual disclaimer applies.     

Economics of public good provision: auditing, outsourcing, and bribery

Abstract .  This study investigates a government's contracting decision to audit or outsource the provision of a public good given a potential hidden bribe and information asymmetries. The key findings are the following. First, the bribe and price of the public good are increasing in the corruptibility of the department. Second, the bribe is decreasing in the firm's bargaining power. Third, a bribery equilibrium exists when the department's corruptibility is sufficiently high given the firm's bargaining power. A bribe involves extortion or a compensatory payment depending on the department's corruptibility. Only a compensatory bribe affects the department's contracting decision.