Role of Social Preferences and Coalitions in a Public Goods Game

The boon of public goods to a society is its inclusive nature where no individual can be restricted from enjoying its fruits. However, this very feature generates proclivity among individuals in the society to escape paying their share towards creation of the public good, which is known as free-riding. Interestingly, contribution levels in reality surpass predictions suggested by theoretical findings. To understand and assuage the free-riding problem, we study a public good game where individuals in a society form small groups or coalitions to carry out collective decisions about contribution levels. Such cooperative action is further augmented when we account for social and other-regarding preferences in individuals, which make them care about well-being of others.

While social preferences are well documented in other economic environments, their effect on the formation, likelihood and size of coalitions to provide public goods is not well understood. This dissertation uses both theoretical and experimental methods to incorporate social preferences into the study of coalition formation and how such coalitions affect the provision of the public good. In any public good provision problem, marginal per capita return (MPCR) is an important determinant. For every dollar a person spends on privately providing the public good, the MPCR measures how much the individual gets back. Conventional theory suggests an inverse relationship between coalition size and MPCR, which stands contrary to recent experimental evidences. My dissertation uses heterogenous social preferences to arrive at sufficient conditions which establishes a positive relationship between coalition size and MPCR.

Chapter 2 theoretically investigates the conditions required to achieve a positive relationship between coalition size and MPCR when an individual's social preference is private information. The model is a two-stage public good game, where in the first stage individuals decide whether or not to join the coalition and then in the next stage, the coalition votes to contribute to public good. The results suggest that individuals with pro social preferences are more likely to join the coalition and upon joining always contribute to the public good. Higher MPCR further increase an individual's likelihood to join coalition and contribute to public good. The results hold true under different model specifications as well.

Chapter 3 test the theoretical predictions of Chapter 2 by using an experiment. In the experiment, subject's payoff is determined by exogenously inducing social preferences into an individual's payoff function. The experiment validates the predictions of theoretical model and we find that individuals who have lower weight on their own payoff are likely to join the coalition and also vote to contribute to public good. Higher return from public good also results in larger coalition size and increases the likelihood to contribute to public good.

Chapter 4 also tests the theoretical prediction, however, here the preferences are estimated by using an incentivized task based on how much money they are willing to give to someone else. The outcomes from the incentivized task suggest that individuals who give more money to others are more likely to join the coalition and also contribute to public good. High MPCR ensures larger coalition size and more individuals contributing to public good. We also find that coalition size have a positive impact on individual's decision to join the coalition and contribute.