On the Formation of Coalitions to Provide Public Goods - Experimental Evidence from the Lab

On the Formation of Coalitions to Provide Public Goods - Experimental Evidence from the Lab
An RFF Academic Seminar
Thursday, December 17, 2009

The provision of public goods often relies on voluntary contributions and cooperation. While most of the experimental literature focuses on individual contributions, many real-world problems involve the formation of coalitions. International agreements serve as an example where some countries form a coalition to cooperate while others may free-ride on the coalition's efforts. This paper experimentally tests theory on the formation of coalitions and compares its different institutions to a voluntary contribution mechanism. The experiment confirms the rather pessimistic conclusions from the theory: only few players form a coalition. Contrary to theory, coalitions that try to reduce the free-riding incentives by requiring less provision from their members, cannot attract additional members. However, substantial efficiency gains occur from larger coalition sizes when members can suggest a minimum contribution level with the lowest common denominator being binding. The experiment shows that the way how terms of coalitions are reached matters for the acceptance of such institutions. However, the coalition structure suffers from manifesting inequality between insiders and outsiders. As such, the “lowest common denominator” structure works best if combined with a voluntary contribution mechanism. Here, coordination frequently achieves close to efficient public good provision levels.