Public Goods Agreements with Other-Regarding Preferences

Charles D. Kolstad

NBER Working Paper No. 17017
Issued in May 2011
NBER Program(s):   EEE   PE

Why cooperation occurs when noncooperation appears to be individually rational has been an issue in economics for at least a half century. In the 1960's and 1970's the context was cooperation in the prisoner's dilemma game; in the 1980's concern shifted to voluntary provision of public goods; in the 1990's, the literature on coalition formation for public goods provision emerged, in the context of coalitions to provide transboundary pollution abatement. The problem is that theory suggests fairly low (even zero) levels of contributions to the public good and high levels of free riding. Experiments and empirical evidence suggests higher levels of cooperation. This is a major reason for the emergence in the 1990's and more recently of the literature on other-regarding preferences (also known as social preferences). Such preferences tend to involve higher levels of cooperation (though not always). This paper contributes to the literature on coalitions, public good provision and other-regarding preferences. For standard preferences, the marginal per capita return (MPCR) to investing in the public good must be greater than one for contributing to be individually rational. We find that Charness-Rabin preferences tend to reduce this threshold for individual contributions. We also find that Charness-Rabin preferences reduce the equilibrium size of a coalition of agents formed to provide the public good. In contrast to much of the literature, we treat the wealth of agents as heterogeneous. In such cases, we find that transfers among agents of the coalition may be necessary to sustain cooperation (regardless of the nature of preferences). An example drawn from experiments is provided as an illustration of the effectiveness of social preferences.

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This paper was revised on June 1, 2012

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Document Object Identifier (DOI): 10.3386/w17017

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