Pareto Improvements Under Matching Mechanisms in a Public Good Economy

Abstract

Matching mechanisms have been proposed to mitigate underprovision of public goods in voluntary contribution models. This paper investigates Pareto-improving equilibria under various matching schemes with two heterogeneous players. First, this matching mechanism avoids free riding and each player has incentives to provide matching contributions at interior equilibria because providing matching contributions is better off while accepting matching contributions is worse off. Second, given any income distribution within the interiority zone players can always implement small matching schemes to make them both better off. This finding is useful for cooperation, particularly in the context without complete information of global preferences or at the international level without a central government. Third, on the contrary, at corner equilibria providing matching contributions is worse off while accepting matching contributions is better off. Thus, if income distribution is beyond the interiority zone, there are no Pareto-improving matching equilibria.