The assurance problem in a laboratory market

Abstract

In the most general terms, a public good exhibits the characteristic of nonexcludability; its benefits are available both to those who help to provide it and those who do not. Two other important features of the public goods provision problem are (i) the mechanism or institution for providing the good and (ii) the incentive structure for potential providers. Among the most familiar institutions is the voluntary contributions mechanism (VCM) combined with an incentive structure such that, for a single period, low levels of contribution are a dominant strategy equilibrium, while some higher level of provision is Pareto-superior. There has been a considerable amount of experimental research on such an environment (see Isaac and Walker, 1987a, for a survey). The existence of such a dominant strategy equilibrium, however, is not the only potential source of problems for the VCM. In particular, under alternative environments a potential provider can have an incentive to contribute if, and only if, he or she has a credible guarantee that others will also contribute. Absent such a guarantee, the provider may withhold. An environment exhibiting these incentives but without such a guarantee is sometimes said to exhibit the assurance problem (see Schmidtz, 1987).