The Dynamic Free Rider Problem: A Laboratory Study

49 Pages Posted: 27 Aug 2015

See all articles by Marco Battaglini

Marco Battaglini

Cornell University

Salvatore Nunnari

Bocconi University; Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research

Thomas R. Palfrey

California Institute of Technology - Division of the Humanities and Social Sciences

Date Written: August 2015

Abstract

Most public goods are durable and have a significant dynamic component. In this paper, we report the results from a laboratory experiment designed explicitly to study the dynamics of free riding behavior in the accumulation of a durable public good that provides a stream of discounted benefits over a potentially infinite horizon. This dynamic free-rider problem differs from static ones in fundamental ways and implies several economically important predictions that are absent in static frameworks. We consider two cases: economies with reversibility (RIE), where the agentsÂ’ voluntary contributions to the public good can be positive or negative; and economies with irreversibility (IIE), where contributions are non negative. For both economies, we characterize the unique Markov perfect equilibrium. The evidence supports the main predictions from the theory: behavior is generally consistent with stationary, forward-looking behavior; both in RIE and IIE the accumulation path is inefficiently slow and the public good under-provided; and RIE induces significantly higher public good contributions than IIE. A number of interesting deviations from the theoretical predictions are observed: both in RIE and in IIE we have over-investment in the early rounds of the game; in RIE over-investment is followed by periods in which negative contributions correct the stock, bringing it back to the predicted steady state; in IIE over-investment tends to decline approaching zero. To test the Markovian assumption, we compare the predictions of the Markov equilibrium with the prediction of the most efficient subgame perfect equilibrium and propose a novel experimental methodology that relies on the comparison between the behavior in the dynamic game and the behavior in a one-period reduced-form version of the dynamic game.

Keywords: durable public goods, experiments, voluntary contribution mechanism

JEL Classification: C72, C73, C78, C92, H41

Suggested Citation

Battaglini, Marco and Nunnari, Salvatore and Palfrey, Thomas R., The Dynamic Free Rider Problem: A Laboratory Study (August 2015). CEPR Discussion Paper No. DP10788, Available at SSRN: https://ssrn.com/abstract=2652158

Marco Battaglini (Contact Author)

Cornell University ( email )

Ithaca, NY 14853
United States

Salvatore Nunnari

Bocconi University

Via Sarfatti, 25
Milan, MI 20136
Italy

Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research

Via Roentgen 1
Milan, 20136
Italy

Thomas R. Palfrey

California Institute of Technology - Division of the Humanities and Social Sciences ( email )

1200 East California Blvd.
301A Baxter Hall
Pasadena, CA 91125
United States
626-395-4088 (Phone)
626-4432-1726 (Fax)

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