Assurance payments on the coordination of threshold public goods provision: An experimental investigation

Zhi Li, Dongsheng Chen and Pengfei Liu

Journal of Public Economic Theory, 2023, vol. 25, issue 2, 407-436

Abstract: We investigate the assurance payment mechanism (APM) in a single‐unit threshold public good game. APM offers an assurance payment (A P $AP$) as compensation to would‐be contributors if the group fails to provide the good and individual contributions reach a pre‐determined price. We characterize the set of pure‐strategy Nash equilibria for APM under complete information and show that assurance payments substantially reduce the multiplicity of equilibria and eliminate the set of non‐provision equilibria in a general setup. We find strong evidence that APM improves upon the baseline provision point mechanism without assurance in lab experiments. Assurance payments act as a coordination device and induce more contributions concentrated on A P $AP$, especially for agents with values above A P $AP$, leading to more frequent successful provision, higher group contributions, and an overall welfare improvement. Our experimental findings highlight the non‐equilibrium mis‐coordination as the main reason for the non‐provision of threshold public goods and indicate that the format of assurance payments plays a key role in successful coordination even when provision is the unique equilibrium outcome.

Date: 2023
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