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Published November 2016 | Submitted
Journal Article Open

Static and dynamic underinvestment: An experimental investigation


In this paper, we analyze 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 two-period version of Battaglini et al. (2012). The experimental design allows us to disentangle inefficiencies that would result in a one-shot world (static inefficiencies) from additional inefficiencies that emerge in an environment in which decisions in the present affect future periods (dynamic inefficiencies). We solve the first-best solution and compare it to the symmetric stationary subgame-perfect equilibrium of a legislative bargaining game. The experimental results indicate that subjects do react to dynamic linkages, and, as such, there is evidence of both static and dynamic inefficiencies. The quantitative predictions of the bargaining 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 the model's predictions, a systematic pattern emerges — namely, the use of strategic cooperation, whereby groups increase the efficiency of current proposals by selectively punishing, in future proposals, individuals who propose highly inefficient allocations.

Additional Information

© 2016 Elsevier B.V. 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 and 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, the 2013 workshop on Behavioral Public Economics at Vienna, the 2013 ASSA San Diego Meetings, the 2013 Public Choice Society Meetings, and the 2013 Caltech Conference on Experimental Political Economy. We thank the Editor and two referees for their helpful comments and suggestions. Fréchette is grateful for financial support from the NSF (SES-1225779 and SES-0924780), the CV Starr Center, and CESS. Palfrey gratefully acknowledges financial support from the NSF (SES-0962802 and SES-1426560), the Gordon and Betty Moore Foundation, and the Russell Sage Foundation.

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August 20, 2023
August 20, 2023