Public Good Provision with Participation Costs
25 Pages Posted: 20 Apr 2020
Date Written: March 31, 2020
Esteban and Ray (2001) develop a model with an increasing marginal cost of contribution and overturn the Olson hypothesis that large groups are unable to provide themselves with a rival public good. Pecorino and Temimi (2008) consider fixed, but avoidable, participation costs in this framework. They conclude that public good provision must fall to zero in a large group if the degree of rivalry is sufficiently high, because the individual payoff goes to zero at the interior equilibrium. Thus, individuals prefer a corner solution of zero contributions to incurring the fixed participation cost. However, when the degree of rivalry is sufficiently low, they conclude that provision of the public good will rise without bound. We show that this latter conclusion is incorrect, and that any degree of rivalry will lead to a total breakdown in public good provision in a sufficiently large group. Not including the fixed participation cost, the difference in the payoff to an individual when she contributes to the public good and when she does not contribute goes to zero in a large group. Thus, in a sufficiently large group, she will not be willing to incur the participation costs. The same result also applies to the Morgan (2000) lottery mechanism.
Keywords: Public Goods, Group Size Paradox
JEL Classification: D7, H41
Suggested Citation: Suggested Citation