Provision of public goods using a combination of lottery and a provision point

Abstract

This paper experimentally examines the effect of using lotteries in conjunction with provision points to finance public goods. While lotteries and provision points both reduce free-riding, they do not completely eliminate the free-riding incentive of individuals, often leaving the good unprovided. In the search for a mechanism that works better, we propose the use of a lottery along with a threshold requirement and test it in a laboratory experimental setup against the popular provision point mechanism. We find that a lottery involving a small prize and a threshold outperforms the provision point mechanism by increasing the average amount of contributions and the frequency of provision. We further test an extension of our mechanism that is well-suited for situations with multiple public goods. The mechanism is designed to avoid monetary prizes associated with lotteries, preventing legal complications and diversion of funds from the public good production. It also has the advantage of easing coordination among the potential donors trying to meet the threshold. The findings confirm that the new mechanism may improve the efficiency of private provision of public goods and have implications for crowdfunding websites with varying rates of project failure, arising partially from their reliance on provision point mechanisms.