Free riders and the optimal prize in public‐good funding lotteries

Abstract

AbstractWe prove the existence and uniqueness of an equilibrium in a game where players, whose preferences exhibit constant absolute risk aversion or constant relative risk aversion, contribute to a public good via lottery‐ticket purchases. Contrasting models with risk neutrality, we show that an equilibrium with a strictly positive amount of the public good may not exist without a sufficient number of participants who are not too risk‐averse. We show that players who are more risk‐averse purchase fewer lottery tickets and are more likely to free ride in equilibrium. In fact, it is possible for free riders to place a larger value on the public good than do those who contribute. In a symmetric equilibrium, we show that an upper bound exists for the amount of the public good, even though there are infinitely many participants. Furthermore, we derive a lottery prize that maximizes the amount of the public good in a symmetric equilibrium and find that such a prize always results in an overprovision of the public good.