Static and Dynamic Underinvestment: An Experimental Investigation

50 Pages Posted: 2 Jan 2015

See all articles by Marina Agranov

Marina Agranov

California Institute of Technology

Guillaume R. Frechette

New York University (NYU) - Department of Economics

Thomas R. Palfrey

California Institute of Technology - Division of the Humanities and Social Sciences

Emanuel Vespa

UC Santa Barbara - Department of Economics

Date Written: December 18, 2014

Abstract

In this paper we design a stylized version of an environment with public goods, dynamic linkages, and legislative bargaining. Our theoretical framework studies the provision of a durable public good as a modified version of Battaglini et al. (2012). We develop an experimental design that allows us to disentangle inefficiencies that would result in a one-shot world (static inefficiencies) from extra inefficiencies that emerge in an environment in which decisions in the present affect the future (dynamic inefficiencies). We solve for efficiency and also characterize the bargaining equilibrium, a symmetric stationary subgame-perfect equilibrium, which is the most common concept used in applied work. The experimental results indicate that subjects do react to dynamic linkages and, as such, we find evidence of both static and dynamic inefficiencies. In fact, the quantitative predictions of the model with respect to the share of dynamic inefficiencies are closest to the data when dynamic linkages are high. To the extent that behavior is different from what is predicted by the model, a systematic pattern emerges, namely the use of strategic cooperation whereby subjects increase the efficiency of period one proposals by selectively punishing, in period two, subjects who did not propose efficient allocations.

Suggested Citation

Agranov, Marina and Frechette, Guillaume R. and Palfrey, Thomas R. and Vespa, Emanuel, Static and Dynamic Underinvestment: An Experimental Investigation (December 18, 2014). Available at SSRN: https://ssrn.com/abstract=2540354 or http://dx.doi.org/10.2139/ssrn.2540354

Marina Agranov

California Institute of Technology ( email )

Pasadena, CA 91125
United States

HOME PAGE: http://www.hss.caltech.edu/~magranov/

Guillaume R. Frechette (Contact Author)

New York University (NYU) - Department of Economics ( email )

19 West Fourth St., 6th floor
New York, NY 10012
United States

HOME PAGE: http://https://files.nyu.edu/gf35/public/html/econ.htm

Thomas R. Palfrey

California Institute of Technology - Division of the Humanities and Social Sciences ( email )

1200 East California Blvd.
301A Baxter Hall
Pasadena, CA 91125
United States
626-395-4088 (Phone)
626-4432-1726 (Fax)

Emanuel Vespa

UC Santa Barbara - Department of Economics ( email )

2127 North Hall University of California
Santa Barbara, CA 93117
United States

HOME PAGE: http://https://sites.google.com/site/emanuelvespa/

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