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

The provision of public goods often relies on voluntary contributions and cooperation. Many economic experiments have studied the determinants of cooperative behavior as well as the implementation of institutions to increase the voluntary contributions. While most of the experimental literature focuses on individual contributions to public goods, many real-world examples involve situations in which subgroups of individuals or countries (coalitions) implement an institution to address the public good problem. International agreements serve as one example. Some countries may form a coalition to cooperate while others may free-ride on the coalition's efforts. Forming a coalition thereby involves (at least) two challenges: On the one hand, the institutional arrangement needs to attract members to the coalition. On the other hand, any given coalition should be able to increase the provision of the public good. In this paper, we compare the ability of different institutions to address these two issues by means of a laboratory experiment. We thereby test theory on the formation of coalitions and compare the resulting provision level of the public good with those achieved by institutions that do not allow for the formation of groups, like a voluntary contribution mechanism. Our experiment shows that only few players form a coalition and only minor efficiency gains result when members are required to contribute a certain amount to the public good. The coalition structure is better accepted when coalition members can negotiate about the public good provision and agree on the "smallest common denominator". The experiment thereby shows that the way how terms of coalitions are reached matters for the acceptance of such institutions. However, the results indicate that not all players participate in the coalition. The coalition structure therefore suffers from manifesting inequality between insiders and outsiders and thereby lowers the willingness of coalition members to provide the public good. If, in contrast, all players are forced to take part in the negotiations about the smallest common denominator, they often achieve close to efficient public good provision level.

Dannenberg, Astrid, Andreas Lange and Bodo Sturm (2010), On the Formation of Coalitions to Provide Public Goods – Experimental Evidence from the Lab, ZEW Discussion Paper No. 10-037, Mannheim.