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Lotteries as a funding tool for financing public goods

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Author Info
Rob Moir ()
Abstract

In the Review of Economic Studies, Morgan (2000) proposed that targeted self-funding lotteries could be used as a method of increasing voluntary contributions to public goods. In the same issue, Morgan and Sefton (2000) tested the theoretical predictions in a laboratory experiment and found support for the theory. The theory, and consequently the experiment, both assumed a quasi-linear utility function with one private good and one representative public good. This current research asks the question, does such a lottery work when there are two public goods? In the original case, expected utility maximization causes agents to divert funding away from the private good and towards the public good. Enough resources are diverted to not only fund the lottery prize but also to lead to an overall increase in public good provision thereby increasing social welfare. However, when two public goods are involved, funds are diverted from both the private good and from any out-of-equilibrium voluntary contributions made to the public good that does not involve the lottery. This paper presents the theory and an initial experiment run at CEEL in Trento using PGLottery software designed at McEEL (McMaster) and CEEL. There are two key findings. First, behaviour in a multiple public good experiment seems to differ from behaviour in traditional single public good experiments. Second, opposite to the findings of Morgan and Sefton (2000), the introduction of the lottery decreases efficiency, adding evidence to the argument that lotteries decrease social welfare.

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Paper provided by Computable and Experimental Economics Laboratory, Department of Economics, University of Trento, Italia in its series CEEL Working Papers with number 0401.

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Date of creation: 2004
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Handle: RePEc:trn:utwpce:0401

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  1. Kenneth S. Chan & Stuart Mestelman & R. Andrew Muller, 1998. "Voluntary Provision of Public Goods," McMaster Experimental Economics Laboratory Publications 1998-02, McMaster University. [Downloadable!]
    Other versions:
  2. R. C. Cornes & A. G. Schweinberger, 1996. "Free Riding and the Inefficiency of the Private Production of Pure Public Goods," Canadian Journal of Economics, Canadian Economics Association, vol. 29(1), pages 70-91, February. [Downloadable!] (restricted)
  3. Kenneth S, et al Chan, 1996. "The Voluntary Provision of Public Goods under Varying Income Distributions," Canadian Journal of Economics, Canadian Economics Association, vol. 29(1), pages 54-69, February. [Downloadable!] (restricted)
  4. Walker, Mark, 1981. "A Simple Incentive Compatible Scheme for Attaining Lindahl Allocations," Econometrica, Econometric Society, vol. 49(1), pages 65-71, January. [Downloadable!] (restricted)
  5. Josef Falkinger et al., 2000. "A Simple Mechanism for the Efficient Provision of Public Goods: Experimental Evidence," American Economic Review, American Economic Association, vol. 90(1), pages 247-264, March. [Downloadable!] (restricted)
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  6. Douglas D. Davis & Laura Razzolini & Robert Reilly & Bart J. Wilson, 2003. "Raising Revenues for Charity: Auctions versus Lotteries," Working Papers 0301, VCU School of Business, Department of Economics. [Downloadable!]
  7. Farrell, Lisa & Walker, Ian, 1999. "The welfare effects of lotto: evidence from the UK," Journal of Public Economics, Elsevier, vol. 72(1), pages 99-120, April. [Downloadable!] (restricted)
  8. repec:fth:simfra:00-23 is not listed on IDEAS
  9. Morgan, John & Sefton, Martin, 2000. "Funding Public Goods with Lotteries: Experimental Evidence," Review of Economic Studies, Blackwell Publishing, vol. 67(4), pages 785-810, October.
  10. Isaac, R Mark & Walker, James M, 1988. "Group Size Effects in Public Goods Provision: The Voluntary Contributions Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 103(1), pages 179-99, February. [Downloadable!] (restricted)
  11. Robert Moir, 1998. "A Monte Carlo Analysis of the Fisher Randomization Technique: Reviving Randomization for Experimental Economists," Experimental Economics, Springer, vol. 1(1), pages 87-100, June. [Downloadable!] (restricted)
  12. Franklin Mixon & Steven Caudill & Jon Ford & Ter Peng, 1997. "The rise (or fall) of lottery adoption within the logic of collective action: Some empirical evidence," Journal of Economics and Finance, Springer, vol. 21(1), pages 43-49, March. [Downloadable!] (restricted)
  13. Smith, Vernon L, 1979. " An Experimental Comparison of Three Public Good Decision Mechanisms," Scandinavian Journal of Economics, Blackwell Publishing, vol. 81(2), pages 198-215.
  14. Simon Clark & Ravi Kanbur, 2004. "Samuelson Machines and the Optimal Public-Private Mix," ESE Discussion Papers 83, Edinburgh School of Economics, University of Edinburgh. [Downloadable!]
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  15. Morgan, John, 2000. "Financing Public Goods by Means of Lotteries," Review of Economic Studies, Blackwell Publishing, vol. 67(4), pages 761-84, October.
  16. Falkinger, Josef, 1996. "Efficient private provision of public goods by rewarding deviations from average," Journal of Public Economics, Elsevier, vol. 62(3), pages 413-422, November. [Downloadable!] (restricted)
  17. Theodore Groves & John Ledyard, 1976. "Optimal Allocation of Public Goods: A Solution to the 'Free Rider Problem'," Discussion Papers 144, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
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  18. Amegashie, J.A., 2003. "Negative Externalities and the Private Provision of Public Goods," Working Papers 2003-2, University of Guelph, Department of Economics. [Downloadable!]
  19. Andreoni, James & Petrie, Ragan, 2004. "Public goods experiments without confidentiality: a glimpse into fund-raising," Journal of Public Economics, Elsevier, vol. 88(7-8), pages 1605-1623, July. [Downloadable!] (restricted)
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  20. Bergstrom, Theodore & Blume, Lawrence & Varian, Hal, 1986. "On the private provision of public goods," Journal of Public Economics, Elsevier, vol. 29(1), pages 25-49, February. [Downloadable!] (restricted)
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