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 first form a network through bilateral linking, with or without a link cost, and then contribute to a public good, which can benefit both themselves and their direct neighbors. Theoretically, there are two equilibrium goods provision strategies: splitting and alternation. Conditioned on a goods provision strategy, efficient networks are always symmetric and less dense when the link cost increases. In the laboratory experiment, we find that subjects predominantly converge to splitting instead of alternation, and they are often able to form efficient networks. Subjects form fewer links under a higher link cost, and there is a tendency to form too many links.

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

JEL Classification: D85, C72, C92