The Impact of Burden Sharing Rules on the Voluntary Provision of Public Goods

The provision of public goods often faces the problem that agents need to voluntarily decide on their own contributions or – alternatively – have to agree upon some desired provision level of the public good in combination with a specific burden sharing rule. This challenge is particularly demanding, when, in addition to enforcement problems, interests differ among players due to heterogeneous preferences. International climate policy is an important example. While strong free-riding incentives prevent a pure voluntary and uncoordinated solution, international negotiations are loaded with debates on equity issues, i.e. on what constitutes a fair distribution of a global reduction target for greenhouse gas emissions. In this paper, we investigate how burden sharing rules may impact the provision level of a public good that all agents voluntarily accept. We focus on different rule-based contribution mechanisms that are based on the principle of the smallest common denominator: all agents can suggest a minimum provision level of the public good that is allocated across agents according to some predetermined rule. The minimum of all proposals, i.e. the lowest common denominator, then takes effect and creates a “lower bound” for the individual contribution levels. This approach reflects many real world institutional arrangements that either involve a simultaneous choice of provision goal and burden sharing, or sequentially try to first determine the burden sharing rule before then deciding upon the provision goal. Since each participating country needs to sign and ratify the agreement, the player with the smallest proposal is pivotal. Countries can, however, voluntarily go beyond their obligations. We experimentally compare the ability of different rule-based contribution schemes to overcome the inefficiency in public good provision. Players differ with respect to their benefits from the public good, each group consists of two low-type and two high-type agents. Our results indicate that all rule-based contribution schemes significantly increase both payoff levels relative to the standard voluntary contribution mechanism. Interestingly, the equal-payoff rule Pareto-dominates all other rules. This finding is particularly surprising since all rules are predicted to generate coordination on efficient, but differing allocations. Explicitly addressing redistribution among heterogeneous players by equalizing payoffs performs best due to substantially higher contributions from high-type players. This holds in particular relative to the scheme where high- and low-type players separately can determine their minimum contribution: here, low-type agents end up contributing at the same rate as in the equal-payoff treatment while high-type agents fail to efficiently coordinate. Our results lend insights not only into efficient institutional design for voluntary private provision of public goods, but may also inform the recent climate policy debate on whether to have small agreements among more homogeneous players instead of having one comprehensive Kyoto style agreement that creates complicated burden sharing issues.

Kesternich, Martin, Andreas Lange and Bodo Sturm (2012), The Impact of Burden Sharing Rules on the Voluntary Provision of Public Goods, ZEW Discussion Paper No. 12-033, Mannheim.