Assurance payments on the coordination of threshold public goods provision: An experimental investigation |
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Authors: | Zhi Li Dongsheng Chen Pengfei Liu |
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Affiliation: | 1. MOE Key Laboratory of Econometrics, Department of Public Finance, School of Economics, The Wang Yanan Institute for Studies in Economics, Xiamen, Fujian, People's Republic of China;2. Department of Public Finance, School of Economics, Xiamen University, Xiamen, Fujian, People's Republic of China;3. Department of Environmental and Natural Resource Economics, University of Rhode Island, Kingston, Rhode Island, USA |
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Abstract: | We investigate the assurance payment mechanism (APM) in a single-unit threshold public good game. APM offers an assurance payment () 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 , especially for agents with values above , 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. |
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