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Static and Dynamic Underinvestment: an Experimental Investigation

Agranov, Marina and Palfrey, Thomas R. and Frechette, Guillaume and Vespa, Emanuel (2015) Static and Dynamic Underinvestment: an Experimental Investigation. Social Science Working Paper, 1399. California Institute of Technology , Pasadena, CA . (Unpublished)

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In this paper we design a stylized version of an environment with public goods, dynamic linkages, and legislative bargaining. Our theoretical framework studies the provision of a durable public good as a modified version of Battaglini et al. (2012). We develop an experimental design that allows us to disentangle inefficiencies that would result in a one-shot world (static inefficiencies) from extra inefficiencies that emerge in an environment in which decisions in the present affect the future (dynamic inefficiencies). We solve for efficiency and also characterize the bargaining equilibrium, a symmetric stationary subgame-perfect equilibrium, which is the most common concept used in applied work. The experimental results indicate that subjects do react to dynamic linkages and, as such, we find evidence of both static and dynamic inefficiencies. In fact, the quantitative predictions of the model with respect to the share of dynamic inefficiencies are closest to the data when dynamic linkages are high. To the extent that behavior is different from what is predicted by the model, a systematic pattern emerges, namely the use of strategic cooperation whereby subjects increase the efficiency of period one proposals by selectively punishing, in period two, subjects who did not propose efficient allocations.

Item Type:Report or Paper (Working Paper)
Palfrey, Thomas R.0000-0003-0769-8109
Additional Information:December 18, 2014. January, 2015. Research support from the Center for Experimental Social Science (CESS) at NYU and the Hacker Social Science Experimental Laboratory (SSEL) at Caltech is acknowledged. We thank Matan Tsur, Sevgi Yuksel for comments and research assistance. We have benefited from comments by Nels Christensen, John Kagel, Erkut Ozbay, Charlie Plott, Sergio Vicente, Christoph Vanberg, Alistair Wilson and participants at the 2012 ESA North American Meetings, 2013 workshop on Behavioral Public Economics at Vienna U., 2013 ASSA San Diego Meetings, 2013 Public Choice Society Meetings, and the 2013 Caltech Conference on Experimental Political Economy. Fréchette is grateful for financial support from the NSF, the CV Starr Center, and CESS. Palfrey is grateful for financial support in the form of grants from from NSF, the Gordon and Betty Moore Foundation, and the Russell Sage Foundation.
Group:Social Science Working Papers
Funding AgencyGrant Number
NYU Center for Experimental Social Science (CESS)UNSPECIFIED
Caltech Social Science Experimental LaboratoryUNSPECIFIED
Gordon and Betty Moore FoundationUNSPECIFIED
Russell Sage FoundationUNSPECIFIED
Series Name:Social Science Working Paper
Issue or Number:1399
Record Number:CaltechAUTHORS:20160229-144613925
Persistent URL:
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:64862
Deposited By: Susan Vite
Deposited On:08 Mar 2016 19:15
Last Modified:22 Nov 2019 09:58

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