Public GoodsVoluntary contributions and Risk

Résumé

We analyze two incentive mechanisms as a way of financing public goods. Our mechanism can be interpreted as a variation of a parimutuel lottery in which the total rebate (prize) is made endogenous by setting it equal to a non-increasing function of total bets. The mechanism changes the nature of the standard VCM from a Prisoner’s Dilemma to a Stag-Hunt game. We tested —and found support for— the theoretical predictions of the model by means of a computer-based experiment. The theoretical model and the supporting experimental evidence both suggest the mechanism is an efficient and equitable means to finance public goods through voluntary contributions. In policy terms, and beyond the efficiency and equity considerations, the mechanism would be easy to implement and run given its simplicity and self-sufficiency.