The Endogenous Formation of Coalitions to Provide Public Goods: Theory and Experimental Evidence

The Endogenous Formation of Coalitions to Provide Public Goods: Theory and Experimental Evidence

Date: 2011-04

By: David M. McEvoy (Department of Economics, Appalachian State University)

Todd L. Cherry (Department of Economics, Appalachian State University)

John K. Stranlund (Department of Resource Economics, University of Massachusetts Amherst)

URL: http://d.repec.org/n?u=RePEc:dre:wpaper:2011-2&r=net

This paper examines the endogenous formation of coalitions that provide public goods in which players implement a minimum participation requirement before deciding whether to join. We demonstrate theoretically that payoff-maximizing players will vote to implement efficient participation requirements and these coalitions will form. However, we also demonstrate that if some players are averse to inequality they can cause inefficient outcomes. Inequality-averse players can limit free riding by implementing larger than efficient coalitions or by blocking efficient coalitions from forming. We test the theory with experimental methods and observe individual behavior and coalition formation consistent with a model of inequality-averse players.

Keywords: public goods, coalition formation, inequality aversion, participation requirement, experiments

JEL: C92

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