Public Goods Provision in a Network Formation Game

Abstract

This study investigates how people provide public goods in a network formation game. In this game, players form a network through bilateral linking, with or without a link cost; the players then contribute to a public good, which can benefit both themselves and their direct neighbors. Theoretically, two equilibrium goods provision strategies exist: splitting and alternation. Efficient networks are conditioned on a goods provision strategy and are less dense when the link cost increases. Our laboratory experiment indicates that subjects predominantly converge to splitting instead of alternation and can often form efficient networks. Subjects form fewer links under a higher link cost and tend to form too many links.

Keywords: Network formation, Public goods, Repeated games, Coordination complexity, Laboratory experiment

JEL Classification: D85, C72, C92