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RESEARCH PRODUCT

ASSET MARKETS AND EQUILIBRIUM SELECTION IN PUBLIC GOODS GAMES WITH PROVISION POINTS: AN EXPERIMENTAL STUDY

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We report experimental results on the effects that auctioning the right to play a public goods game with a provision point may have on equilibrium selection and individual behavior. Auctioning off such a right among a larger population of players strikingly enhances public good provision. Once public good provision is obtained, the auction price at the preliminary stage increases to its upper limit, dissipating all players’ gains associated with the provision of the public good. Individual deviations from the equilibrium strategy are neither able to force lower market prices nor to affect provision of the public good in subsequent periods. (JEL C72, C92, H41) I. INTRODUCTION Public good provision is a fundamental source of market failure, since the nonexcludability property of such a good makes it possible to consume it for free, once it is supplied. Thus, in the familiar voluntary contribution mechanism (VCM) model, free riding (i.e., zero contribution) is a dominant strategy and the resulting equilibrium is socially suboptimal. The introduction of provision points eliminates the strict dominance of free riding and generates a multiplicity of pure strategy