Potential Pareto Public Goods

Abstract

Potential Pareto Public Goods create an aggregate benefit to society while harming some members of the community. As the overall benefit outweighs the harm incurred, provision may lead to Pareto improvement if the gains from cooperation are used to compensate the harmed parties. Such situations are ubiquitous, e.g., in not-in-my-backyard (NIMBY) problems. We study experimentally voluntary contributions to Potential Pareto Public Goods, in which provision is efficient but harms a minority in the group. We test the effects of punishment and reward institutions, with and without communication. We find that contributions to Potential Pareto Public Goods are not viewed as unequivocally socially desirable and do not increase with communication or punishment. With the reward institution, communication facilitates compensation, undoing the harm imposed on the minority player by majority contributions. Consequently, contributions are no longer viewed as socially undesirable, and majority contributions increase. Taken together, our results establish that perceptions and behavior in voluntary contributions to Potential Pareto Public Goods are dramatically different than with universal public goods that benefit all members of the community. We suggest that the underlying mechanism is team reasoning: individuals consider what is good for the group, and play their part in achieving that goal.