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The Groves-Ledyard Mechanism: An Experimental Study of Institutional Design

Chen, Yan and Plott, Charles R. (1993) The Groves-Ledyard Mechanism: An Experimental Study of Institutional Design. Social Science Working Paper, 867. California Institute of Technology , Pasadena, CA. (Unpublished)

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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.

Item Type:Report or Paper (Working Paper)
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Additional Information:We would like to thank John Ledyard for his many insightful discussions and suggestions, Dave Grether, Scott Page, Arthur "Skip" Lupia for their comments, and Hsing-Yang Lee for computer programming. Any remaining errors are our own. Published as Chen, Yan, and Charles R. Plott. "The Groves-Ledyard mechanism: An experimental study of institutional design." Journal of Public Economics 59, no. 3 (1996): 335-364.
Group:Social Science Working Papers
Subject Keywords:Public goods, Mechanisms, Design
Series Name:Social Science Working Paper
Issue or Number:867
Classification Code:JEL: C90, D70
Record Number:CaltechAUTHORS:20170823-150747577
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Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:80744
Deposited By: Jacquelyn Bussone
Deposited On:28 Aug 2017 23:34
Last Modified:03 Oct 2019 18:34

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