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Assurance Contracts in Threshold Public Goods Provision with Incomplete Information
1 : Texas A&M University
(TAMU)
3 : University of Connecticut
(UConn)
This paper studies private provision of a discrete public good using provision point mechanism by assuming the social planner has the ability to set up an ``assurance contract" in case of provision failure. Our research is motivated by the positive prospects of dominant assurance contract (Tabarrok, 1998) to address the increasing popularity of using voluntary contribution mechanisms to fund public projects. We modify the existing assurance contract format with the inclusion of a minimum price (MP) and an assurance payment (AP), where an individual will obtain a compensation which equals to the assurance payment if she is willing to contribute above the minimum price in case of a provision failure. We analyze the Bayesian Nash equilibrium for a two-player public goods provision game allowing continuous bids under the assurance contract as well as a N-player public goods game allowing each player to either accept or reject an assurance contract. We show that using an assurance contract, a threshold public good may be provided with an arbitrarily high ex-ante provision probability while the social planner still receive a positive expected profit.
