AN EXPERIMENTAL ANALYSIS OF ENVIRONMENTS WITH LARGE COMMON COSTS AND UNCERTAIN SUPPLIES: APPLICATIONS TO SPACE STATION

Abstract

Suppose we are confronted with an environment which consists of large common costs and uncertain supplies. Furthermore, suppose the resources in this environment are being supplied by a public enterprise monopoly which is interested in maintaining economic efficiency while recovering costs incurred by the project. Then the above problem becomes one of institutional design. Even if conditions existed in which traditional marginal cost pricing provided the proper signals for efficiency, additional charges will be necessary to recover costs due to the large common costs in this environment. Ideas and suggestions about decentralized methods of covering common costs lead naturally to questions about decentralized methods for solving the public goods provision problem. This paper reports in part on an experimental investigation of four methods for allocating public goods. The two basic processes studied are direct contribution and a public goods auction process. Both of these processes are studied with and without an additional unanimity feature. The results suggest that the auction process outperforms direct contribution. The effect of unanimity is to decrease the efficiency of both processes. Strategic aspects of the voting rule (unanimity) are evident in the results. To assist in the contingency planning for environments with uncertain supplies, different contract forms are considered. In particular, priority and contingent contracting are investigated along with specific mechanisms to allocate such contracts. An experimental environment is developed to investigate the various contract forms and mechanisms. The experiment considers two contract forms (contingent and priority) and four allocation mechanisms (Random, English auction, English auction with queue, and Iterative Groves). The experimental results show that bidding for priority results in higher efficiency than pre-assignments. Furthermore, allowing individuals to signal coalitional bids has a positive effect on efficiency and revenue generated.