SFB 303 Discussion Paper No. A - 529

Author: Chen, Yan, and Fang-Fang Tang
Title: Learning and Incentive Compatible Mechanisms for Public Goods Provision: An Experimental Study
Abstract: This is the first systematic experimental study of the comparative performance of two incentive compatible mechanisms for public goods provision: the Basic Quadratic mechanism by Groves and Ledyard (Gamma = 1 and Gamma = 100) and the Paired-Difference mechanism by Walker. Both mechanisms are Nash-efficient and balanced with the same dimensions of message space, and the latter has one advantage over the former in that in equilibrium it is individually rational. However, our experiments demonstrate that the actual performance of the Basic Quadratic mechanism under a high punishment parameter is far better than the Basic Quadratic mechanism under a low punishment parameter, which, in turn, is better than the Paired-Difference mechanism, evaluated in terms of system efficiency, close to Pareto optimal level of public goods provision, convergence to stage game equilibrium and stability. From this we draw some lessons for mechanism design: standard considerations, such as incentive compatibility, individual rationality and balanced budget, are not enough to guarantee that these desirable properties can actually be obtained in a dynamic process with human subjects. Other disequilibrium aspects, such as deviation costs which impose incentives for subjects to learn to play their equilibrium strategies, and deviation sensitivity which can either amplify of diminish noise in a system, are also important to induce good dynamics and stability. To understand principles of individual learning behavior, we estimated three static and four dynamic learning models. Variants of the stimulus response models outperform the generalized fictitious play model. The comparative performance of the three variants of the stimulus response models are statistically indistinguishable.
Keywords: public goods, mechanism design
JEL-Classification-Number: C90, D70
Creation-Date: August 1996
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