Experimental Research on Public Goods
Voluntary Contribution Mechanism Experiments
Experimental research on public goods has primarily focused on the "voluntary contribution mechanism (VCM)" for the supply side provision of a public good. A VCM is characterized by each individual within a group possessing a resource/monetary endowment which they may invest in the provision of the public good. Retaining one's endowment provides an "internal return," contributing to the public goods provides an "external return" for others in the group. In general it is commonly assumed that the internal return is greater than the external return. However, if all contribute to the public good, the sum of all the external returns is greater than the internal return one obtains from retaining their endowment. Therefore, the Pareto efficiency outcome is for everyone within the group to contribute their entire endowment. However, the Pareto Optimal outcome is not the Nash Equilibrium. The Nash Equilibrium will depend on the difference between ones internal and external returns. If the internal return exceeds the external return the Nash Equilibrium is when everyone contributes nothing. This solution proceeds using a backward induction argument.