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The Groves-Ledyard mechanism: An experimental study of institutional design

Chen, Yan and Plott, Charles R. (1996) The Groves-Ledyard mechanism: An experimental study of institutional design. Journal of Public Economics, 59 (3). pp. 335-364. ISSN 0047-2727. doi:10.1016/0047-2727(95)01506-X.

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The Groves-Ledyard mechanism theoretically can solve the ‘free-rider’ problem in public good provision in certain environments. Two questions are of overriding importance in implementing the mechanism. The first is related to the actual performance of the mechanism in general. The second is the choice of a ‘punishment parameter’, γ, which is the only parameter that is available for those who may want to actually use the mechanism. Thus the determination of the role of this variable on mechanism performance is fundamental for any advances along the lines of actual implementation. In studying the Groves-Ledyard mechanism, we show that the punishment parameter, γ, plays a crucial role in the performance of the mechanism. By using γ = 1 and 100, we show that under the higher punishment parameter, the Groves-Ledyard equilibrium is chosen much more frequently; a higher level of the public good is provided and efficiency is higher. By examining two behavioral models, we show that a higher γ leads to an increase in the probability of an individual choosing a best response predicted by the model. The parameter γ alone explains nearly 70% of the data in both the Cournot and the Carlson-Auster behavioral model. We also found that convergence to Cournot behavior is faster and more stable under a high γ than under a low γ.

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Additional Information:© 1996 Elsevier Science S.A. Received October 1993; revised version received December 1994. Reprinted in Experiments in Environmental Economics, Volumes I and II, edited by Jason F. Shogren (2006). Part of The International Library of Environmental Economics and Policy, overall general editors of the series, Tom Tietenberg and Kathy Segerson.
Group:Social Science Working Papers
Subject Keywords: Public goods; Mechanisms; Design
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Other Numbering System NameOther Numbering System ID
Social Science Working Paper867
Issue or Number:3
Classification Code:JEL classification: C90; D70
Record Number:CaltechAUTHORS:20140324-131919533
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Official Citation:Yan Chen, Charles R. Plott, The Groves-Ledyard mechanism: An experimental study of institutional design, Journal of Public Economics, Volume 59, Issue 3, March 1996, Pages 335-364, ISSN 0047-2727, (
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:44469
Deposited On:02 Apr 2014 16:37
Last Modified:10 Nov 2021 16:52

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