Static and dynamic underinvestment

An experimental investigation

Marina Agranov, Guillaume Frechette, Thomas Palfrey, Emanuel Vespa

    Research output: Contribution to journalArticle

    Abstract

    In this paper, we analyze a stylized version of an environment with public goods, dynamic linkages, and legislative bargaining. Our theoretical framework studies the provision of a durable public good as a modified two-period version of Battaglini et al. (2012). The experimental design allows us to disentangle inefficiencies that would result in a one-shot world (static inefficiencies) from additional inefficiencies that emerge in an environment in which decisions in the present affect future periods (dynamic inefficiencies). We solve the first-best solution and compare it to the symmetric stationary subgame-perfect equilibrium of a legislative bargaining game. The experimental results indicate that subjects do react to dynamic linkages, and, as such, there is evidence of both static and dynamic inefficiencies. The quantitative predictions of the bargaining model with respect to the share of dynamic inefficiencies are closest to the data when dynamic linkages are high. To the extent that behavior is different from the model's predictions, a systematic pattern emerges — namely, the use of strategic cooperation, whereby groups increase the efficiency of current proposals by selectively punishing, in future proposals, individuals who propose highly inefficient allocations.

    Original languageEnglish (US)
    Pages (from-to)125-141
    Number of pages17
    JournalJournal of Public Economics
    Volume143
    DOIs
    StatePublished - Nov 1 2016

    Fingerprint

    Dynamic inefficiency
    Linkage
    Underinvestment
    Inefficiency
    Legislative bargaining
    Durables
    Subgame perfect equilibrium
    Bargaining model
    Experimental design
    Prediction
    Prediction model
    Theoretical framework
    Bargaining games

    ASJC Scopus subject areas

    • Finance
    • Economics and Econometrics

    Cite this

    Static and dynamic underinvestment : An experimental investigation. / Agranov, Marina; Frechette, Guillaume; Palfrey, Thomas; Vespa, Emanuel.

    In: Journal of Public Economics, Vol. 143, 01.11.2016, p. 125-141.

    Research output: Contribution to journalArticle

    Agranov, Marina ; Frechette, Guillaume ; Palfrey, Thomas ; Vespa, Emanuel. / Static and dynamic underinvestment : An experimental investigation. In: Journal of Public Economics. 2016 ; Vol. 143. pp. 125-141.
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