A Deduction Mechanism for Public Goods Provision: Theory and Experiment

Abstract

We propose a simple commitment mechanism prior to a public goods contribution game. Each player simultaneously and independently proposes a deduction rate, which serves as a proposal for the rate by which the return on private investment accounts will be reduced. The group deduction rate is determined by the minimum level of the individually proposed rates. In the two-stage game with linear payoffs, the first-best outcome is achieved in the refined equilibrium, with a sufficiently high group deduction rate being chosen. The mechanism also improves efficiency for non-linear games. We conduct a laboratory experiment to empirically investigate whether and how our counter-intuitive mechanism works. The experimental findings highlight the importance of learning opportunities via examples. Even with repeated play, many subjects persist in choosing low deduction rates and therefore, welfare remains low. However, with exogenously given examples of group deduction rates, subjects learn quickly and achieve efficient outcomes when they later determine the deduction rates endogenously.

Keywords: public goods mechanism, commitment, deduction, experiment

JEL Classification: C72, C92, H41