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Growth and inequality in public good provision

Growth and inequality in public good provision

Simon Gaechter, Friederike Mengel, Elias Tsakas, and Alexander Vostroknutov

In this publication in the Journal of Public Economics, Simon Gaechter, Friederike Mengel, Elias Tsakas, and Alexander Vostroknutov report the results of experimental 'public good' games in which participants choose how to divide their resources between two investment options in each of either ten or fifteen rounds of the game. The first is a private option with a smaller but predictable return, while the second has a larger return to be divided equally among all of the players regardless of contribution. Some of the games gave the option for players to penalise other players at a cost to themselves too. . The novelty of the study is that inequality could arise endogenously and had detrimental effects for cooperation. Their findings have implications for understanding the relationships between growth, inequality, and the use of punishments or penalties.

In a novel experimental design, the authors study public good games with dynamic interdependencies, where each agent's wealth at the end of period t serves as their endowment in t + 1. In this setting, growth and inequality arise endogenously allowing them to address new questions regarding their interplay and effect on cooperation. They find that amounts contributed are increasing over time even in the absence of punishment possibilities. Variation in wealth is substantial with the richest groups earning more than ten times what the poorest groups earn. Introducing the possibility of punishment does not increase wealth and in some cases even decreases it. In the presence of a punishment option, inequality in early periods is strongly negatively correlated with group income in later periods, highlighting negative interaction effects between endogenous inequality and punishment.

 

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Posted on Monday 5th June 2017

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