Implementing Lindahl Allocation - Incorporating Experimental Observations into Mechanism Design Theory

Abstract

Mechanism design theory has given economists a set of tools for designing institutions to achieve socially desirable outcomes. Unfortunately, the behavioral assumptions that these theories often rest are somewhat unrealistic. Testing these institutions in a laboratory setting gives us insight into what assumptions or properties of institutions make them behaviorally successful. Moreover these insights allow us to create new theories that offer, in principle, better actual performance. Thus, the interplay between experimental economics and economic theory seems vital in mechanism design to insure successful institutions. It is in this spirit that this dissertation precedes focusing entirely with mechanisms that were designed to achieve the Lindahl allocation in a public goods environment. The first chapter experimentally examines three such mechanisms in a laboratory setting. It finds that the mechanism that gets the closest to the Lindahl allocation is the one that induces a game with very strong stability of equilibrium properties. Unfortunately this mechanism also has some clear disadvantages: first, it is very complicated; second, payoffs to consumers while learning to play equilibrium are very low; and last, the mechanism gets more complicated when more people participate. The second chapter uses the insights from the first experiment to create a new institution which avoids some of the concerns outlined above while maintaining the strong stability of equilibrium property. The third chapter contributes a missing stability result into the literature. The final chapter of the dissertation experimentally compares the new mechanism introduced in chapter 2 with the most successful mechanism from the first experiment. The treatments in this experiment are designed to stress the above observed trouble areas.